Chapter 3 The Big Picture: Economic and Regulatory Aspects William F. Arens McGraw-Hill/Irwin Michael F. Weigold Christian Arens Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. George Frideric Handel Chapter Overview Identifies and explains economic, social, ethical, and legal issues advertisers must consider 3-4 Chapter Objectives Classify two types of social criticisms of advertising Use economic model to discuss advertising effects on society Explain social responsibility and ethics Understand how governments regulate advertising Discuss regulatory issues affecting advertising Describe how federal agencies protect consumers, competitors Define regulatory roles of state/local government Discuss how other agencies fight fraudulent and deceptive ads 3-5 Advertising Controversies Both economic and social concerns Does advertising . . . Affect product value? Influence choices? Cause higher or lower prices? Encourage materialism? Make us buy things we don’t need? Promote or discourage competition? Affect us subliminally? Debase language? Affect demand? Affect art and culture? 3-6 Free Market Economic Principles Self-interest Complete information Many buyers and sellers Absence of externalities 3-7 Q. 1. What is the impact of economics on advertising? Effect on Product Value Advertising gives products added value 3-9 Economic Impact: Billiards Model 3-10 Economic Impact: Affected Areas Prices Competition Consumer pays-ads small % of cost Can reduce businesses in industry Mass production lowers unit cost Inhibit new competitors Gov’t price control Regional and local competition can work Ads can support higher or lower prices 3-11 Economic Impact: Affected Areas Consumer Demand Consumer Choice Stimulates primary demand Encourages unique products, services Influences selective demand New, better brands dominate Influences conquest sales Wider choices for consumers 3-12 Economic Impact: Affected Areas Business Cycles Advertising contributes to the increase Advertising acts as a stabilizing force 3-13 Q. 2. What are the two aspects of the ‘abundance principle?’ Abundance Principle In an economy that produces more goods & services than can be consumed, advertising: Keeps consumers informed about alternatives (complete information) Allows companies to compete more effectively (self-interest) 3-15 Advertising Stimulations Advertising stimulates Competition (many buyers Innovation and sellers) and new products Better education consumers Healthy economy 3-16 Q. 3. What are the aspects of the social impact of advertising? Social Impact: Criticisms Short-term Manipulative Arguments Long Manipulative Arguments 3-18 Q. 4. What are the components of the short-term manipulative arguments? Social Impact: Criticisms Short-term Manipulative Arguments Deception Unfair Practices Puffery False promises Incomplete descriptions False comparisons Bait-and-switch Visual distortions False demonstrations False testimonials Partial disclosure Small-print qualifications 3-20 An Example of Puffery Claiming a Yamaha outboard actually leave a trail in stormlashed waters is legal because it is unbelievable 3-21 An Example of Puffery Claiming Tabasco hot sauce causes corn kernels to pop is legal because it is unbelievable 3-22 Q. 5. What are the components of the long manipulative arguments? Social Impact Criticisms Long-term Macro Arguments Effects on Value System Promotes materialism - Ad Manipulation Incomplete information External societal costs 3-24 Proliferation of Advertising Too much Clutters the different mediums Nuisance for customers Lower effectiveness for advertisers North American problem 3-25 Stereotyping Stereotyping affects: Minorities Women Immigrants Disabled Elderly Others Avoiding stereotypes = embracing cultural diversity 3-26 Insensitivity Whether or not an ad is labeled insensitive depends on Subjectivity Geography 3-27 Social Impact in Perspective Negative Incomplete information Creates unwanted externalities (e.g. interferes with free press) Biased Positive Contributes to growth and prosperity Rich information source Offers information not found in other sources 3-28 Social Responsibility and Ethics Public service announcement from Abbott Mead Vickers BDDO Insert photo 3.9, p.66 “Think! Slow down” PSA Position = 2.7” horiz., 1.5” vertical Size = 4.6” TALL Resolution = 300 dpi Social Responsibility and Ethics Public service announcement from the Brain Injury Association of America Insert photo 3.13, p. 71 Towel snowboarding ad Position = 2.9” horizontal, 1.5” vertical Size = 5.7” WIDE Resolution = 300 dpi Social Responsibility and Ethics An advertiser can act unethically or irresponsibly… without breaking any laws! 3-31 Social Responsibility and Ethics Public service announcement from the Ad Council about Multiple Sclerosis 3-32 Q. 6. Define Ethical Advertising. Ethical Advertising • Doing what the advertiser and the advertiser’s peers believe is morally right in a given situation. 3-34 Q. 7. Define Social Responsibility. Ethical Advertising • Doing what society views as best for the welfare of people in general or for a specific community of people. 3-36 Social Responsibility and Ethics Ethical = morally right Promote well-being Draw crowds to events Socially Responsible = society views as best Responsible advertising can... Promote harmony, stability Influence elections 3-37 Interrelated Components of Ethics Traditional actions of people in a society or community Philosophical rules society sets to justify past or future actions Attitudes, feelings, and beliefs of personal value system 3-38 Q. 8. What are the levels of ethical responsibility? Levels of Ethical Responsibility 3-40 Q. 9. How does the government regulate advertising? How Government Regulates National Legislative, executive, judiciary State Governor, attorney general, various departments Municipal Mayor, city manager, police chief, courts, city attorney 3-42 Pitfalls of International Regulation • Varies from country to country • Restrictions on what is said, shown, done • Bans on specific products • Time slot restrictions • Bans on coupons, premiums, tie-in offers • Prohibition of paid placements in shows • Arbitrary rulings • Pre-approval requirements 3-43 Current U.S. Regulatory Issues Supreme Court: “speech” or “commercial speech” Tobacco Controversy Advertising to Children Consumer Privacy 3-44 Speech: Central Hudson Test • Does the commercial speech at issue concern a lawful activity? • Will the restriction of commercial speech serve the asserted government interest substantially? • Does the regulation directly advance the government interest asserted? • Is the restriction no more than necessary to further the interest asserted? 3-45 Q. 10. What are the various federal advertising regulatory agencies? Federal Regulation: Agencies FTC Deceptive, unfair, comparative ads FDA Nutritional Labeling & Education Act (NLEA) FCC Broadcast media licensing Patent & Trademark Office Intellectual property Library of Congress Copyrights “works of authorship” 3-47 Federal Regulation: Trademarks Coca-Cola’s trademark look is retained through use of similar letterforms and style, even with different alphabets 3-48 State & Local Regulation Printer’s Ink guidelines: untrue, deceptive, misleading “Little FTC” consumer protection acts National marketers comply with states’ laws Local government regulation: city and county consumer protection agencies 3-49 Q. 11. What are the various nongovernmental advertising regulatory agencies? Nongovernment Regulation Better Business Bureau (BBB) National Advertising Review Council (NARC) National Advertising Division (NAD) National Advertising Review Board (NARB) Regulation by the media Regulation by consumer groups Self-regulation by advertisers 3-51 Self-Regulation: Agencies & Associations Advertising Agencies Research and verify claims and comparative data before use Liable for misleading/fraudulent claims May use in-house legal counsel Industry-Wide Associations American Association of Advertising Agencies (AAAA) American Advertising Federation (AAF) Assoc. of National Advertisers (ANA) 3-52 Self-Regulation: AAF Principles 3-53