Wednesday, April 09, 2008

In defense of false ads

There have been numerous complaints by cellphone users about misleading advertisements. Service providers are racing to attract consumers in a Bertrand price war, using advertisements as attractor. Some ads are extremely dumb.

Should the government take any action on this?

No. Banning false advertising only reflects the belief that the average people, consumer, is stupid. It is as if, as Stigler said, individual consumer can in no way detect fraudulent claims and promises. So he has to be protected from his own incompetence. That's nonsense.

15 comments:

dendi said...

I think the problem is not whether the consumers are stupid or not, then they should be protected.

The gov. need to enter the market to reduce "searching costs" of the consumers. You can imagine if the consumers receive false advertisements, then they have to allocate more time & some other costs just to make sure the information is right before they make decisions. (See for example, Hal R. Varian, 1980. Model of Sales, AER, 70,4.)

a.p. said...

False and misleading are different things, no? If one says 'brand new TV' but in fact it is a used one, then it's a false ad. If one says 'job interview' but in truth it is a multilevel marketing presentation, that it's a false ad.

If one says 'zero tariff' (or unlimited call), while in fact it's zero tariff between the 4th and 6th minute, for calls within the same provider, from 11pm-6am, then yes it's misleading, but not false. Well, true, the 'terms and conditions' are always written in 6-pt fonts at the end of the ad. But if something looks too good to be true, then it definitely is.

Aco said...

Dendi and a.p., yes I think I have mixed up 'false' and 'misleading' - sorry about that. But my point is asking the government to ban false or misleading ads is too much. I'm all for the requirements to any producers to disclose ingredients used in their production (think about medicines and food/beverages), supposedly confirmed by some authorized body (as in POM). But those are not ads. Everybody shoild be free to advertise the way he wants. When it is false, misleading, or just plain ugly, it's consumer's job to decide; not government's.

Arya Gaduh said...

Aco:
Eh? So the government shouldn't step in when a pharma company makes false claims about a drug that are impossible to verify by individual customers?

Individual rationality is bounded. In many cases, the government has a better information set.

Aco said...

Arya, give me an example case of such false claim that you think justifies government's action.

Arya Gaduh said...

Aco:
"Clinical research has shown that baby formula is a better supplement of nutrition than a mother's own milk for those between 0-6 months".

Aco said...

Arya, I guess there are unlimited numbers of clinical researches that come up with nonsensical conclusion. It would be hard to imagine the government has to counter all of them -- they have many more important things to do.

Besides, for the example you gave. I think one needs to be stupid to buy it at face value. My beloved mother didn't go to college but she rejected that 'false claim' right away when she heard it. Without consulting to any government official. I think there are millions of mothers (even those with low education) out there who would rather milk their babies with their god-given own milk rather than some formula. And again, those who could afford baby formula are usually those who are relatively educated and not poor. I assume they have the brain to use. Or at leat they should be able to afford higher search cost.

Arya Gaduh said...

Aco:
More important things to do? More important than preventing health hazards to young children of poor uneducated parents (and, in the case of general drugs, the general public)? You aren't serious, right?

My doctor of a sister used to work in a remote hospital in Kalimantan, and she can testify that poor uneducated mothers do buy such ads.

False ads is a form of market failure; one that, to a certain extent, the government can correct. I don't think that the government should regulate all ads. But this is different from saying that it's nonsense for the government to regulate a certain class of ads.

Aco said...

Arya, yes I am serious, regarding your example. But if you said that poor uneducated mothers buy such "ads", then maybe I am wrong (Still, I find it hard to believe: How would such ads get into remote areas? How would poor family afford information like that? Most importantly: How would the poor families afford the expensive baby formula? How come they decide to buy formula than to breastfeed their babies?)

Arya Gaduh said...

Aco wrote:
"Still, I find it hard to believe: How would such ads get into remote areas? How would poor family afford information like that? Most importantly: How would the poor families afford the expensive baby formula?"

Answer to first and second: Television combined with "ads" -- ie., product placement -- placed in maternity wards and Puskesmases. Second, when they can't purchase the expensive baby formula, they substitute with various forms of powdered milk -- clearly a social welfare loss.

In fact, your so-called "stupidity" can be observed not only amongst poor uneducated mothers. I have heard it echoed amongst younger, (now) middle-class parents. Ask to your obstetrician if you don't believe me.

By the way, the controversy over ads and baby formula is not hypothetical. See here.

However, the baby formula is just an example to illustrate a broader point that an ad can worsen information asymmetry. For health-related products, they create health hazards. If this does not justify government intervention, I don't know what does.

Aco said...

Arya, again, those who can afford going to puskesmas, accessing information, then buying formula, or even powdered milk are not the poorest. Even if they, the poorest ones in remote areas buy the claim, will they not breast feed their babies?

You're probably right that middle-class parents buy such ads. But I'd rather use public fund not to educate these not-so-poor people about ads. I'd rather use the money to help improve basic education (so no one will need to be protected every time some misleading ad is displayed in front of them, for example). Here, basic education, that I think justifies government's role. Not wasting people's tax money to educate middle class wealthier people to read ads.

Yes, milk formula is only an example. Feel free to give me another one -- because I'm not convinced.

And by the way, I have nothing against boycotting like that Nestle story you mentioned. In fact, it's good if people boycott products that they thing are bad. You don't need government to do that.

dendi said...

"Advertising contributes to consumer welfare by providing information, which lowers consumer search costs... (BeVier, 1992,p.8) or see Varian (1980), for search costs model

So, if it is false then search costs would be higher since consumer should verify the info. It hurts consumer welfare. "False advertising is unequivocally bad. It increases uncertainty and impedes decision making. It is highly correlated with consumer dissatisfaction and disappointment" (BeVier, 1992, p.14). Then, consumer surplus would be lower.

In this situation, I think the gov's role is needed to make sure that any info given in advertising is true.

BeVier, Lillian R. (1992). Competitors suits for false advertising under section 43(a) of the Lanham Act: a Puzzle in the law of deception. Virginia Law Review 78(1), 1-48

Aco said...

Dendi, I totally agree that ads can increase search costs and false ads unequivocally consumer welfare reducing. But does that justify government assistance to consumers? I'd say no, with reasons I have written above.

I should've probably made it clear that promotion is different with facts/information. (I know this dichotomy is confusing. But for lack of better terms, I'll use it; please bear with me). What I mean is, products should come with information like ingredients, specification, contra-indication (as for medicine) and the government should enforce this (again as in POM). I wrote once about key information on air carrier that should be disclosed to consumers and why the authority might need to enforce the disclosure. But this kind of information is not promotion. For promotion (i.e. ads), producers can say whatever they want. If it's false, sue them, boycott them.

Arya Gaduh said...

Aco:
As you yourself noted, the dichotomy between "information provision" and "promotion" is illusory.

Let me exemplify: Is packaging part of promotion or information provision? If it's the former, then is it okay to put false information on the packaging? If it's the latter, then why would companies spent so much on designing attractive packages?

But more interestingly, why would you support POM labeling regulation in the first place? Isn't it the same as having the government protect individuals from their own incompetence? Under your premise, shouldn't individuals set up their own labs and start testing the ingredients of everything they bought? How are the two different?

Aco said...

Arya, false promotion like what? Putting a nice word saying "This is the best TV you can get" when you know that that must not be true, because it's branded as Sonny, not Sony? Yes, it's perfectly fine. What kind of info do you have in mind?

On POM. See, you got me wrong. I want the government to make sure that every medicine has these information: indication, dosage, contra-indication. But I don't want the government to intervene on how the medicine is promoted, as in "This medicine will make you stronger than ever". I hope you can see the difference.