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The Impact of Media and Advertising on Product Demand, Market Share, and Social Welfare

----------------------------------------Dr. Mohammad Selim Royal University for Women - Kingdom of Bahrain

Media and advertising play vital role in creating product demand and market share. It also impacts the social welfare of the society. Media connectstheconsumersbyhighlightingtheversatilecharacteristics of the products that consumers may not know them before. Media and advertising create an urge for the products and consumers are virtually on the search for such products until they can actually consume and test them. Advertising the products and services through media and information technology is as revolutionary as industrial revolution in the past. Now in new millennium, even a tiny firm or a small country can use such techniques of advertising through dynamic media and information technology and can advertise across the globe in a matter of seconds. Firms or countries which were unknown before and had hardly any imprint or impact on global market place, now creating enormous demand for their products and services through media and information technology. The impact of technological revolution in media and advertising contributed a great success in boosting the demand for both traditional and non-traditional goods and services, including travel and tourism, education, medical treatments, entertainment and a host of other goods and services. Everything is happening so fast that many firms and countries are facing constraints to match the supply with unprecedented demand response. In the world of


differentiated products and imperfect competition, among all the products with similar quality and standard, obviously the product with media exposure will be picked up first, market demand for such products will soar, and eventually the market share will expand. It is perceived that advertising through media and information technology has relatively greater impact in GCC countries. Whether it is new real estate development or Formula 1 race events, the continuous advertising through media and information technology is creating instantaneous results and the soaring demand for the products and services. As a result, the products and services are sold out in matter of hours or days. This is indeed creating an enormous challenge as well as opportunities for the firms and nations. However, when advertisements are unchecked and unregulated, false claims, exaggerations, fabrications very likely to occur and social welfare will suffer. This paper investigates how the media and advertising will impact on the product demand, market share, and social welfare when advertising in media outlets will be checked for accuracy, quality commitment and for maximizing social welfare by encouraging ‘public good’ aspect of advertising and minimizing ‘public bad’ aspects through appropriate legislative and fiscal measures.

JEL Classification: M31, M21, M37, M38, D11 Key words: Advertising, Media, Direct-to-consumer advertising, ‘Public Good’, anti-advertising, ‘Public Bads’ Repetitive advertising.


Every week, billions of dinars are spent on advertising and it is one of the most powerful forces for good or evil. It is considered good because media and advertising have positive impact on market demand, sales and market share. McGuinness and Cowlling (1975) showed that advertising had positive and statistically significant impact on sales. Duffy (1991) found that advertising has impact on the composition of aggregate consumer demand. It is considered evil because billions of dinars are wasted just to sell the same products and services by misleading consumers and misallocating resources. It is even more serious when the burden of such exploitation are borne by the very victims – the consumers and tax payers who have been already suffered because of such imposed advertising war on them. For introducing a new product, manufacturer may resort to advertising campaign, slotting allowance and aggressive media coverage for their products. Desai (2000) observed that advertising allows new manufacturers to enter into the market. In this perspective, advertising allows a new manufacturer to introduce the newly produced product or service. It is definitely, an advantage and important tool that can be explored for the introduction of the products and services. In such ways, each and every new producer will enjoy enormous opportunities to get into the market and reach out the consumers. Global marketing, advertising and intensive media coverage often shifts the demand curve for a product or a service to the right and the firms enter into domestic and foreign markets. Most multi national firms market their product in the global market and advertising play a very important role in securing market share in local and global markets.


Advertising changes the structure of the economy. Muller and Hamm (1974) have found that the structure of the economy changes and concentration tends to increase rapidly with high advertising intensities. Such findings reveal that advertising is one of the single most powerful tool in shaping consumer demand, production strategy, and market power. Repetitive advertising creates an appeal to the consumers and increases sales. Ehrenberg (2000) believes that advertising has extraordinary power, and in most time, it is effective. Such extraordinary power if unleashed to the consumers who are often not well informed about the different features of the product or service, they may easily be exploited. In such cases, consumers can be victims if the claims of advertisement are not verified, challenged and approved. Often we may leave to the market forces to correct such negative externalities, but in reality, advertising in different media outlets are similar to framing, where advertisers only want the consumers to know exactly what advisers want to portray. In such unchartered territory, consumers are helpless, misled, and in many cases, suffer in the long run. There must be an agency with appropriate power, transparency, and they will be dedicated to defend and protect the public interests and help maximizing social welfare of the nation. The paper is organized in the following manner. The effects of advertising harmful goods and services, often called ‘public bads’ are outlined in section 2. In addition, the impacts of anti-advertising are also addressed. Section 3 focuses on the negative impact of direct-to-consumer advertising. Section 4 addresses the issues of ‘Public good’ and ‘Public bad’ aspects of advertising. Section 5 examines advertising costs and its impact on profit and net income. Section 6 outlines overlapping nature of ‘public good’ and ‘public bad’ aspects of advertising. Section 7 highlights advertising, media coverage, and election results. Section 8 establishes necessary and


sufficient conditions for maximizing social welfare of advertising. Concluding remarks are summarized in section 9.

The Effects of Advertising Harmful Goods and Services versus Anti-advertising:
Advertising of cigarettes, alcohol, and fast food often attract young cohort of the population and its impact could be devastating. The demand for such harmful products often increases if there is no negative advertising, control, legislative laws, taxation, or penalties. It is most likely that in absence of such control, it will create health, safety, and social problems for every dinar increase in advertising costs for such ‘public bads’ or harmful products. The Impact of anti-advertising, such as smoking cause cancer and other heart diseases and complications could be a very important tool in minimizing negative impact of tobacco related epidemics. McGuinness and Cowlling (1975) emphasized that publicity and advertising about negative health effects of smoking, often called ‘anti-advertising’ reduces consumptions of cigarettes. Similarly, by employing anti-advertising on any product or service that impact negatively on health, safety and general welfare of the people can yield positive benefits and well being to the society. An appropriate public policy must be designed along with the taxation system which will set rules for what is allowed and what is not allowed from the society’s points of view. It can be enforced through strict law, built-in incentives, taxes and penalties depending on the nature of the goods and services.


The Negative Impact of Direct-to-Consumer Advertising:
Direct- to- consumer advertising in health care, such as drugs, and the patients’ insistence on prescribing certain highly advertised drugs leaves no choice for the doctors but to prescribe those drugs when Medicare is privately funded rather publicly provided. Calfee, Winston, and Stemski (2002) estimated the impact of direct-to-consumer advertising and the demand for cholesterolreducing drugs are statistically significant compared to other form of advertising. The demand for such drugs sky rockets when drug manufacturers engage in direct-to-consumer advertising rather to health care providers. Gilbody, Wilson, and Watt (2005) have demonstrated that directto-consumer advertising leads to increased prescription of the advertised product. Patients often request for exact drugs and physicians just compromise in prescribing those drugs. In other words, patients are led to believe the effectiveness of certain drug through professional advertising skills. In such cases, any deception of any form on the part of the advertisers of pharmaceutical companies about the effectiveness of certain drugs may cause over use and over prescription of those drugs over other relatively more useful drugs. Patients often believe the advertisers more than they do to their family doctors. It is not unusual that patients may even exaggerate the conditions and symptoms just because they want the prescription for those advertised drugs in any means. Such unfortunate effects of advertising are taking place simply because there is no such effective watch dog or agency which can verify the claims and can exactly rewrite the content of advertisements. Without such protection, good drugs will be ignored; inappropriate drugs will be prescribed and the society will continue to suffer until such regulations are in place. One cannot expect any benefits of such biased prescriptions of inappropriate drugs resulting purely from advertising urge and ignoring physicians’ sound judgments.


Jagsi (2007) examined similar cases of conflicts of interest and the physician-patient relationship in the era of direct- to- patient advertising. Such conflicts of interest often yields sub optimal outcomes in health care sector, jeopardize patients’ safety, proper patient treatment, disease control and eventually reduce life expectancy of the population. Stange (2007) analyzed doctor-patient and drug company-patient communication trends. It has been observed that direct to patient advertising has reversed the communication channel from doctor –patient to rather drug company-patient, and as a result, patients are prone to responding advertisements of the drug companies and often attempt to ignore doctors’ advice. If such advertisement contents are exaggerated, manipulated, or even fabricated, the patients will be victimized and the cost to the society will be enormous unless the society and policy makers come forward with appropriate control and screening measures. These are essential for protecting the consumers’ rights and interests in a framework where most consumers are unaware of long term consequences of treating with inappropriate or even with completely wrong drugs.

Public Good versus Public Bad Aspects of Advertising:
When radio stations and TV channels do not charge the consumers for good programs, it is often considered public good while cable networks charge pay-per-view is considered private good. Advertising for fast food for kids and young adults are highly effective especially during children shows. Any ban on such advertisement is expected to curb the number of obesity, health complications, diabetes and overweight kids. This is also true for young as well as for older population. Advertisements for soft drinks often lead to addiction to soft drinks in stead of fresh water which in turn often creates long run side effects on health and well being.


The consumers must be informed about the short run and long run side effects of all advertisements and, especially the effects of over consumption or addiction for particular product or service.

Advertising Costs and its Impact on Profit and Net Income:
If one firm advertises its products, the rival firm will follow the same so that the second firm can retain its market share. If there are n number of rival firms, it is most likely that all firms will engage in advertising in different media outlets including the distribution of flyers in every weekends, TV and radio commercials, newspapers, bill board, promotions, websites, instant messaging on SMS, magazines, etc. Almost all the economic agents, entrepreneurs, education and service providers, political leaders, military strategist engage in advertising, framing and media coverage in one form or other. Consequently, the society as a whole incurs billions of dinars of advertising expenses in every week and unfortunately, the incidence of such lavish extravaganza befalls on the consumers and tax payers. When all firms engage in advertising, the pay-offs for each firm will dwindle. If they can find some sort of consensus where all the firms can refrain from advertising campaign, it is most likely that most firms will end up with greater pay-offs. In imperfect market place, such consensus is most unlikely but the government can coordinate a systems of arrangements under which unfair and unfounded claims of marketing strategy can be minimized by incorporating and disclosing the negative features of each product and service. In other words, when firms will engage in marketing, it will be required to each firm to provide full disclosure about negative aspects of the products and services. As a result, many firms will choose not to advertise because consumers may reflect more on negative aspects of the product rather the positive aspects. When many firms will refrain from advertising, it is most likely that the advertising war will die down and enormous cost of advertising can be passed on to the consumers, tax payers and even to the producers


and sellers in the form of higher profits which in turn will increase investment spending, employment, output and prosperity.

Overlapping Nature of ‘Public Good’ and ‘Public Bad’ Aspects of Advertising:
Advertisement for vacation, tourism, sports and fun activities have both ‘public good’ aspects as well as ‘public bad’ aspects. When vacation, tourism, sports and fun activities are designed to promote knowledge, enhance mutual understanding of nations or even for enjoying holidays, and good health, it may foster mutual friendship, economic, social and cultural cooperation. Without streamlining such industry, it may easily fall into ‘public bads’ and the people will suffer. The social cost may exceed the social benefit when advertising of products and services are unchecked and do not follow the values, norms, hopes, and aspirations of the societies. Certain things are definitely ‘pubic bads’ in advertising as mentioned above. However, by maximizing welfare contents or ‘public goods’ aspects of advertising such as early screening for cancer and serious diseases, healthy food choices, exercise and involvement in wellness program, spreading 100% quality education and healthcare for all, encouraging good behavior and kindness to all, for being honest, sincere, and hardworking, paying attention to rare species, reducing waste and protecting environment can play a significant role in sustainable development and media can play a crucial role.

Advertising, Media Coverage and Election Results:
Advertising and media exposures also affect election results, and, therefore, free and judicious choices of the people are distorted and results are biased towards campaign advertising. As such, the election results in modern democracies are questionable because advertising and media campaign may sway away the public opinion


and the lobbyist group can easily manipulate and choose who will be elected and who will not.

Conditions for Maximizing Social Welfare of Advertising:
The necessary condition for maximizing social welfare is to increase sales, output, employment, and income by increasing advertising in media outlets for both goods and services of desirable natures, and all new and established manufacturers, sellers, and service providers will have access to such powerful tool of marketing for both local and global market places. The sufficient condition is to check by appropriate agency for accuracy of contents of advertisements, quality of product and services, commitment of on time delivery, guarantee and ‘no questions ask’ return policy.

Concluding Remarks:
No doubt, advertising is one of the most important tools of increasing market demand for goods and services, and for increasing market share in all sectors of the economy. However, advertising in the media outlets has become an important public policy issues in modern times. It is very important that government officials must outline the advertising policy, the content verification whether true or false, quality issues, health and safety requirements, prevention of fraud in transactions, commitment of exact delivery of goods and services, and fair return policy. Such preconditions are the cornerstones of guaranteeing the welfare of the society. Unchecked and fraudulent advertising not only jeopardize public interests, it will also entail enormous economic, social and emotional costs to the society. Regulating and monitoring advertising and media coverage may also guarantee the quality, commitment, durability, and perfection of the products and services in the long run. At least the sellers will be held accountable for many goods and services, and their actions will not go unchallenged. Such enforcements may slow


down short run economic growth but it may lead to steady state long run sustainable growth for the economy where all economic agents are expected to benefit.

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