John Calfee Article

A great truth about advertising is that it is a tool for communicating information and shaping markets. It is one of the forces that compel sellers to cater to the desires of consumers. Almost everyone knows this because consumers use advertising every day, and they miss advertising when they cannot get it. This fact does not keep politicians and opinion leaders from routinely dismissing the value of advertising. But the truth is that people find advertising very useful indeed.

Of course, advertising primarily seeks to persuade and everyone knows this, too. The typical ad tries to induce a consumer to do one particular thing--usually, buy a product--instead of a thousand other things. There is nothing obscure about this purpose or what it means for buyers. Decades of data and centuries of intuition reveal that all consumers everywhere are deeply suspicious of what advertisers say and why they say it. This skepticism is in fact the driving force that makes advertising so effective. The persuasive purpose of advertising and the skepticism with which it is met are two sides of a single process. Persuasion and skepticism work in tandem so advertising can do its job in competitive markets. Hence, ads represent the seller's self interest, consumers know this, and sellers know that consumers know it.

By understanding this process more fully, we can sort out much of the popular confusion surrounding advertising and how it benefits consumers.

How Useful is Advertising?

Just how useful is the connection between advertising and information? At first blush, the process sounds rather limited. Volvo ads tell consumers that Volvos have side-impact air bags, people learn a little about the importance of air bags, and Volvo sells a few more cars. This seems to help hardly anyone except Volvo and its customers.

But advertising does much more. It routinely provides immense amounts of information that benefits primarily parties other than the advertiser. This may sound odd, but it is a logical result of market forces and the nature of information itself.

The ability to use information to sell products is an incentive to create new information through research. Whether the topic is nutrition, safety, or more mundane matters like how to measure amplifier power, the necessity of achieving credibility with consumers and critics requires much of this research to be placed in the public domain, and that it rest upon some academic credentials. That kind of research typically produces results that apply to more than just the brands sold by the firm sponsoring the research. The lack of property rights to such "pure" information ensures that this extra information is available at no charge. Both consumers and competitors may borrow the new information for their own purposes.

Advertising also elicits additional information from other sources. Claims that are striking, original, forceful or even merely obnoxious will generate news stories about the claims, the controversies they cause, the reactions of competitors (A price war? A splurge of comparison ads?), the reactions of consumers and the remarks of governments and independent authorities.

Probably the most concrete, pervasive, and persistent example of competitive advertising that works for the public good is price advertising. Its effect is invariably to heighten competition and reduce prices, even the prices of firms that assiduously avoid mentioning prices in their own advertising.

There is another area where the public benefits of advertising are less obvious but equally important. The unremitting nature of consumer interest in health, and the eagerness of