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Accounting For Tastes

A Simple Theory of Advertising As A Good Or Bad

Research by Gary S. Becker and Kevin M. Murphy

“Economists, traditionally, have had a very uneasy relationship with advertising,” says University of Chicago professor Gary Becker. “Consumer preferences were thought to be either too stable or too easily manipulated.” But in his latest book, “Accounting For Tastes,” Becker employs the tools of modern economic analysis to confront the problem of preferences and values -- how they are formed and how they affect our behavior. In a chapter from the book, Becker and co-author Kevin Murphy, professor of economics and industrial relations at the University of Chicago Graduate School of Business, apply the economic theory of complements to advertisements and challenge the traditional characterizations of advertising itself.

In the chapter “A Simple Theory of Advertising as a Good or Bad,” Becker and Murphy present the idea that advertisements are not merely tools for manipulation or a means to an end. Rather, advertisements are ends in themselves, a “good” that we consume.

“Think of advertisements as complementary goods that you buy along with the product that's being advertised,” says Murphy. “Take the example of movies and popcorn. Going to the movies makes you want to eat popcorn, and eating popcorn makes you think of watching movies. There's a complementarity there between the two items. We believe that advertising is basically the same thing. There is a tie between the product and the advertisement. They are complementary goods.”

Each time we stay tuned to a commercial or read an ad in a newspaper, we have, according to the authors, made a “transaction.”

This theory earns extra weight when applied to today's advertising campaigns -- advertisements for popular items like Levi's jeans, Coca-Cola or Nike shoes. In traditional terms, an advertisement provides new or useful information about a product. But in some of these popular advertising campaigns, little or no new information is presented about the product, but consumers nonetheless experience and sometimes even enjoy the advertisements as “consumer goods” unto themselves.

Skeptical? Consider the results from a famous study by psychologists which showed that consumers paid more attention to advertisements for the car of their choice after they bought it. Becker and Murphy say their treatment of advertisements as complements to the goods advertised can explain these findings. They believe that if advertisements are complements to goods advertised, those goods are complements to the advertisements. That is, greater consumption of advertised goods would raise the marginal utility from, and the demand for, advertising.

This logic forms the crux of the authors' theory, but it has not been received without skepticism.

“Most economists understand informative advertisements, ads that give new information about the product such as the nutritional content and so forth,” says Becker. “But advertising that somehow tries to affect people's preferences is troublesome for economists -- in fact, there is a long history of hostility toward that type of advertising.”

These ads have been accused of distorting tastes, not delivering any quantifiable utility or benefit to consumers.

Although the authors agree that many “noninformative ads” -- or ads that do not provide new information about the product -- do create wants without offering information, they do not agree that these ads change tastes. Rather, they include advertisements as one of the goods that enter the fixed preferences of consumers. In other words, Becker and Murphy argue that advertising affects consumers' “utility” -- or we have a taste for ads that we seek to satisfy.

Advertising Is (a) Good

The usual economic definition of a “good” is something consumers are willing to pay for, and a “bad” is something consumers pay to have removed or must be compensated to accept. Both goods and bads are part of given utility functions. For example, horror movies are “goods” for the many people who pay to be frightened, and garbage is a “bad” because people are willing to pay to have it removed.

These straightforward definitions of goods and bads suggest that noninformative advertisements are “goods” in utility functions if people are willing to pay for them – they need not actually pay in equilibrium – and such advertisements are “bads” if people must be paid to accept them. If advertisements are considered “taste shifters” rather than goods, why aren't horror movies considered taste shifters rather than goods? Why aren't expensive cars, opera tickets and many other things that consumers buy considered taste shifters rather than goods?

Certainly, the authors argue, consumers may respond to the social and psychological pressures generated by advertisements. But they also respond to such pressures when considering whether or not to dine at prestigious restaurants, or pay high prices to own a Mercedes car. Just as advertisements exert social and psychological pressures, so do many other goods we purchase.

Advertisements “give favorable notice” to other goods, and they raise the demand for these goods. In consumer theory, goods that favorably affect the demand for other goods are usually treated as complements to those other goods, not as shifters of utility functions.

“Therefore, there is no reason to claim that advertisements change tastes just because they affect the demand for other goods,” says Becker.

Further Analysis

After establishing the idea of advertisements as “goods” that we consume, the authors continue to use economic analysis to probe questions such as, What type of goods will be advertised and how will they affect preferences? Do we have too much advertising, or too little? What is the difference between advertising on television and radio and advertising in newspapers? And if advertising is such a valuable good, why aren't people willing to pay for it separately?

In a final section of the chapter, the authors give special consideration to the properties of radio and television advertising, and show that advertisements attracted to these media, rather than printed publications, tend to lower the utility of -- or benefit to -- viewers. Becker and Murphy believe advertisers must provide utility-raising programs (your favorite TV shows) to compensate the viewers for exposing themselves to the ads.

“One can say either that advertising pays for the programming -- the usual interpretation -- or that programming compensates for the advertising, which is our preferred interpretation,” says Becker.

It might seem unlikely that most radio and television ads reduce utility since companies are willing to spend such a large amount of money on these formats.

But the authors explain that “just as death, divorce, unemployment, and similar utility-reducing events often induce greater drinking, smoking, overeating and similar changes in consumption, so, too, do many advertisements lower utility and yet raise demand for the advertised goods. These ads produce anxiety and depression, stir up envious feelings toward the success and happiness of others, or arouse guilt toward parents or children.”

In other words, we may not enjoy watching a commercial that makes us feel inadequate, but once we've viewed it, we've made a purchase; the theory of complements says the chances are high, then, that we will buy the complement product.

“Indeed,” says Becker, “in some ways the assumption that many ads lower utility is easier to reconcile with consumer behavior than is the assumption that they raise utility.”

Gary S. Becker is University Professor of Economics and Sociology at the University of Chicago. Kevin M. Murphy is the George Pratt Shultz Professor of Economics and Industrial Relations at the University of Chicago Graduate School of Business.

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