The Economic,

Social &
Regulatory
Aspects
of Advertising

Lecture Session

Unit -2
Society
• Refers to an organized group of persons
associated together for distinct purposes.
The characteristics include:
– Social structure (People: rules of social interaction)
– Social organization (Government: laws)
– Religion (Church: rules for “good” and “bad”)
– Economic organization
– Material culture (e.g., tools, weapons, clothing, media)

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Planned vs. Unplanned Effects
• Firms develop advertising to achieve specific short-term
marketing/business goals
– Planned effects of advertising
• Advertisements may have long-term social and cultural
impacts on society
– Unplanned effects of advertising
• Effects are at odds with each other, as unplanned effects
may be negative for society due to …
• Two opposing cultural viewpoints of advertising
– Advertising is mirror of society
– Advertising shapes society

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Advertising Reflects Society
ADVERTISING

Reflects Reflects
Popular Society’s
Culture Values
Reflects Provides
Value Of Sense Of
Brand Belonging

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Advertising Affects Society
ADVERTISING
Promotes
Offensive
Materialism

Harmful to Pervasive &

Children Intrusive

Dictates
Reinforces
Helps Media
Stereotypes Subliminal
Sell Bad Content
Powers
Products

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Advertising & Consumer Demand
• Selective
Primary Demand
Demand
– Demand for a
the
particular
entire product
brand.category.

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 What Role Does Advertising
Play in Our Economic System?

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Let’s Take A Look
• Advertising is one of the most visible
activities of any business.
• Business’ advertise because they believe it
will help them sell their products, services or
ideas.
• The level of advertising in any country is
directly proportional to its standard of living.

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• Advertising adds value to a brand by
educating the customer
about product uses.

• Example:
– Kleenex was originally
advertised as
make-up remover.

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 If All Companies
Stopped Advertising,
Would Products Cost Less?

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Not Really…
Supreme Court have ruled that by
encouraging competition, advertising
has the effect of keeping prices down.

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Costs

Advertising is paid for by

the consumer.

The cost of a bottle of

Coca-Cola includes
about a penny for
advertising.

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“Advertising is just one element of the mass
distribution system which allows
manufacturers to engage in mass production,
which in turn, lowers the unit cost of
products.”

Note: The saving is passed onto

the consumer in the form of
lower prices.

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Social Criticism of Advertising
• “Advertising is deceptive or manipulative.”

• Note: If a product does not live up to its ads,

people will stop buying the product or service.
Consumers have the ultimate veto power.

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Advertising/Our Value System
• “Does advertising encourage us to buy
more cars, more CD’s, more clothing,
more junk food and more coffee?”

• FACT: Only 17% of US Consumers see

advertising as a source of information to
help them decide what to buy.

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Deceptive Advertising
• “Any ad that contains a misrepresentation,
omission, or other practice that can
mislead a significant number of
reasonable consumers to their detriment.”

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Commercial Puffery
• Exaggerated but subjective claims which
can’t be proved true or false.

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Use of Puffery
• “Citibank. Live Richly.”

• “Hallmark, When You Care Enough To Give

The Very Best.”

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Others:

• “Visa. All You Need.”

• “Discover- It pays to Discover.”

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Puffery Example
Headline:
“A LOBO Hardwood Floor Does For A Room What
A Soul Does For A Body.”
-or-
“Florida, The Perfect Place For
A Perfect Vacation.”

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Economic Effects
• Two perspectives on how advertising
interacts with competition
– Advertising as Market Power Model
– Advertising as Information Model

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The Two Models
Advertising as Market Power Advertising as Information

Brand Differentiation Brand Differentiation

Advertising manipulates consumers Advertising informs consumers

Brand Loyalty
Brand Switching
Consumers become loyal,
Consumers are shopping for best buy
less price sensitive

Reduced Competition Increased Competition

High costs to enter the market. Lower costs to enter the market
High costs to maintain sales and market Opportunity to build sales with
share Media economies of scale better product

Monopolistic Market Competitive Market

Market Power Consumer Power

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Ethics in Advertising
Ethical Dilemmas
Would you work for the following?
1. Agency for cigarette manufacturers
2. Promotions for hospitals that allow abortion?

Answer is a personal decision, not based on rules

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Hypothetical
Assuming cigarette advertising
to children/teens is not banned
by governmental regulations,
would you advertise cigarettes to
children?
Why or why not?

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Suggestion for Making an Ethical Decision
1. Define the ethical issue and any related one.
2. Identify competing parties of interest.
3. Identify values that are at issue.
4. Identify which ethical principle(s) you will use in
making the decision.
5. Identify any connections, loyalties or
responsibilities that you, yourself, have that
might guide you in one direction or another.
6. Make the decision.
(Potter)

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Legal Aspects In Advertising
Free Speech vs. Commercial Speech
“Congress shall make no law respecting an
establishment of religion, or prohibiting the free
exercise thereof; or abridging the freedom of
speech, or of the press; or the right of the
people peaceably to assemble, and to petition
the Government for a redress of grievances.”

The First Amendment of the U.S. Constitution

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Test for Commercial Speech
Central Hudson Gas & Electric Corp. vs.
Public Service Commission (1980)
– Supreme Court ruled that utilities may advertise. In this
decision, the Supreme Court established a four part test for
determining whether commercial speech could be regulated.
1. Is the commercial speech an illegal activity, or is it misleading?
If NO, then:
2. Is the government interest in suppressing the commercial
speech substantial?
3. Does the proposed regulation directly advance the government
interest asserted?
4. Does the proposed regulation go no further than necessary to
advance that interest?

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 MRTP ACT - 1969

Primary Governmental Regulatory Body

The Monopolies and Restrictive Trade Practices

Act, 1969, aims to prevent concentration of
economic power to the common detriment,
provide for control of monopolies and probation
of monopolistic, restrictive and unfair trade
practice, and protect consumer interest..

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Unfair Advertising
• Advertising practice is considered
unfair when:
– It causes substantial harm that a
consumer or competitor may not
reasonably avoid
– It leads to monetary or
unwarranted safety and health
risks
– It might encourage undesirable
or harmful behavior

Mint - o - Fresh
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Self-Regulation
• National Advertising Review Council (NARC)
– National Advertising Division (NAD)
– National Advertising Review Board (NARB)
• NAD investigates truthfulness of national ads
• Findings can be appealed to NARB
– NARB conducts additional review
• NAD decisions are referred to FTC when
advertiser does not comply.

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Deceptive Advertising
• Contains a misrepresentation.

– Example: Minute Maid Orange Juice

claims to have more “food energy”
than tomato juice, while failing to
mention that “food energy” is really
defined as calories.

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Bait-and-Switch
• Advertise a product to bring people into
the store, then “switching” them to a higher
priced model by claiming that the
advertised product is out of stock or poorly
made, ie. auto, stereo.

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 Subliminal Advertising (Myth)

Intentionally create ads

with sexual messages
hidden within an illustration.

Comparative Advertising

To claim superiority over

named competitors..
Horlicks & Complan,
Pepsodent and Colgate.

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FDA (Food & Drug Admin.)
• “Their job is to see that the food we eat is
safe, the cosmetics we use won’t hurt us
and the medicines we buy are safe and
effective.”

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 Remedies for
or Deceptive Advertising

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• Consent Decree: Advertiser signs a
document agreeing to stop the
objectionable advertising without admitting
wrongdoing.
• Cease-and-Desist Order: Prohibits
further use of the ad. (FTC Issued)
• Corrective Advertising: For some period
of time, correcting a statement which ran
without substantiation.

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Social Responsibility
& Advertising Ethics
• “Laws determine what advertisers can and
cannot do, but they also allow a significant
amount of leeway.”

– Example: Beer and Tobacco

Companies could sponsor rock
concerts for college students.

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 Therefore, an advertiser can act

unethically or irresponsibly without

breaking any laws.

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Brand Promise

Taste

Commitment

Fun

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The Many Controversies
About Advertising
make us buy things
Does advertising . . .
we don’t need?

affect product value? make us more

materialistic?
discourage
affect us subliminally?
competition?
affect art?
influence consumer choice?
increase prices? debase
language?
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Sampath Kumar Kumaraswamy 43
The Many Controversies About Advertising

Economic Societal

make us buy things make us more

we don’t need? materialistic?
affect product value? affect art?
discourage affect us subliminally?
competition? influence consumer choice?
debase
increase prices?
language?
affect demand?
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Economic Impact of Advertising

Effects on . . .

prices
competition
demand

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value of
45
Sampath Kumar Kumaraswamy
products
Economic Impact of Advertising

Effects on . . .

Primary demand
Secondary demand
Consumer choice
demand
Business cycle
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Sampath Kumar Kumaraswamy
 Abundance Principle:
The Economic Impact of Advertising in Perspective

Complete information

Self-interest

Abundance
Principle
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Social Responsibility and
Advertising Ethics
Ethical advertising Social responsibility

Advertiser’s social responsibility

Ethics of advertising

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 Government Restraints on International Advertisers

Puffery
Children
Tobacco

Premiums and
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 Ad Agencies

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 Structure & Organization

What agencies do
and how they’re
organized to do it.?

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 7 Primary Services
Complete a marketing analysis

Develop an advertising plan

Prepare a creative strategy

Create advertising executions

Develop and implement a media plan

Handle billing and payments

Integrate other marketing communications

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 4 functions of full-service
agencies

Account Management

Creative

Media planning & Placement

Research
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Agency Organization Chart
Board of
Directors
[Chairman/CEO]

President
[COO]

Other Marketing Strategy Office Management

Communications Review Board [Personnel,
Services [Managment Accounting,
[PR, etc.] Committee] Legal, etc.]

Account Mgmt. Creative Research Media Dept.

Director Exec CD Director Director

Management Associate Project Associate

Supervisor Creative Managers Media
Director Director

Account Creative Research Media

Executive Group: Assistants Supervisor

Asst. Account Copy Spvr. & Art Supervisor Media Media

Executive Copywriters & Art Directors Planner Buyer

Broadcast Print Analysts

Production Production

Traffic

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 Account Management
Representing
Liaison between Responsible for client point of
Agency & Client understanding... view within the
agency

the client’s
business

the client’s
marketing
needs

strategy
development

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 Account Management
Account Mgmt.
Director
Account Management Director

Management.
Management Supervisor
Supervisor

Account Supervisors
Account
Supervisor
Account Executives
Account
Executive
Assistant Account Executive’s
Asst. Account Account
Executive Coordinator Account Coordinators

Traffic Traffic
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 Creative Department

Responsibility
 the creative department is responsible
for creating and producing the print and
broadcast advertising
 strategy is key
 good creative work is always guided by a
creative strategy that sets forth goals to
be accomplished and key message
points to be relayed

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 Creative Department
Executive & Group Creative Directors

Creative Director

Associate Creative Director

Copywriters

Art Directors

Broadcast Producers

Print Production Managers

Traffic Coordinators

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 Media Department

• The media department has two main

functions - planning and buying.
 THE PLANNING GROUP HANDLES
MORE STRATEGIC MARKETING AND
MEDIA ISSUES.
 THE BUYING GROUP HANDLES
MEDIA NEGOTIATIONS AND
IMPLEMENTATION.
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 Media Department
Media
Director Media Director

Associate Associate Media Directors

Media
Director Media Supervisors

Media Media Planners

Supervisor
Media Buyers
Media Media
Media
Planner Buyer Media Analysts Plan

Analysts
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 big changes in the
media department
mega-agency media departments
have now become profit centers

agencies have set up their media

departments as free-standing units

many large clients now look at media as a

separate service
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 Research Department
Interpret Market Environment
• Gather & Analyze research data.
• Primary & Secondary techniques
Determine Consumer Needs / Perceptions
• Understand Problems
Advise how ads can meet Strategic goals
• Help Find Solutions
Research
Report

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 Research Department

Research
Director Research Director

Project
Research Project Managers
Managers

Research Research Assistants

Assistants

Outside
Research
Research Outside Research Specialists Report
Suppliers
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Auxiliary Agency Functions

Account Planning

Strategy/Creative
Review Board

• Human Resources
Office • Legal Services
Management • Accounting
• Recruitment

64
3 ways agencies make money

Commissions
• usually 15% of gross costs

Fees
• usually based on negotiated hourly rate

Incentives
• still relatively new and problematic
• usually based on performance goals
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AGENCY COMMISSIONS
• media commission system
– 15% media commission
• adjustable commission rates
– negotiate to match client budget
– sliding scale
• markups-production & service
– add a percentage markup to costs
– 17.65% of net = 15% of gross
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4 types of fee systems

Fixed Fee (retainer)

Cost-Plus fee

Performance Fee

Hybrid fee & Commission

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Campaigns:

• Advertising Campaigns

“Advertising
is a team
sport!”
Campaigns:

• Origin of term

Campaign - a series of military

operations with a particular
objective in a war

Campaign - a series of organized

planned actions with a particular
purpose, as for electing a candidate.
Campaigns:

Military Campaigns

“Victory is my objective. War is my strategy.”

Winston Churchill
 Campaigns:
• Military Campaigns

Advertising and
“a series of marketing use Example: a very
military both the popular
operations with a language and the marketing
particular military book…
objective in a mindset
war”
Campaigns:

Advertising Campaigns

“Advertising is a
team sport!”
Campaigns:

 A team effort
 Structured and
sequential activities
 An imaginative re-
integration of new
and existing factors
 Shared objectives
and strategies
 Plans & Strategies:
Organized Actions and…

“Imaginative Reintegration”

Plans & Strategies are a combination of:

• Tightly organized planned actions
• Unique strategic configurations
Plans may contain strategies

Strategies need plans to be implemented

 Thank U
Advertising Gone Too Far?

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