Chapter 3 The Big Picture: Economic and Regulatory Aspects William F. Arens Michael F. Weigold Christian Arens McGraw-Hill/IrwinCopyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

3-2 Chapter Overview Identifies and explains economic, social, ethical, and legal issues advertisers must consider

3-3 Chapter Objectives Classify two types of social criticisms of advertising Use economic model to discuss advertising effects on society Explain social responsibility and ethics Understand how governments regulate advertising Discuss regulatory issues affecting advertising Describe how federal agencies protect consumers, competitors Define regulatory roles of state/local government Discuss how other agencies fight fraudulent and deceptive ads

3-4 Advertising Controversies Affect product value? Encourage materialism? Affect us subliminally? Promote or discourage competition? Affect demand? Cause higher or lower prices? Debase language? Affect art and culture? Make us buy things we don’t need? Influence choices? Both economic and social concerns Does advertising...

3-5 Free Market Economic Principles Self-interest Many buyers and sellers Complete information Absence of externalities

Q. 1. What is the impact of economics on advertising?

3-7 Effect on Product Value Advertising gives products added value

3-8 Economic Impact: Billiards Model

3-9 Prices Consumer pays-ads small % of cost Mass production lowers unit cost Gov’t price control Ads can support higher or lower prices Competition Can reduce businesses in industry Inhibit new competitors Regional and local competition can work Economic Impact: Affected Areas

3-10 Consumer Choice Encourages unique products, services New, better brands dominate Wider choices for consumers Consumer Demand Stimulates primary demand Influences selective demand Influences conquest sales Economic Impact: Affected Areas

3-11 Business Cycles Advertising contributes to the increase Advertising acts as a stabilizing force Economic Impact: Affected Areas

Q. 2. What are the two aspects of the ‘abundance principle?’

3-13 Keeps consumers informed about alternatives (complete information) Abundance Principle In an economy that produces more goods & services than can be consumed, advertising: Allows companies to compete more effectively (self-interest)

Advertising Stimulations Advertising stimulates Innovation and new products Competition (many buyers and sellers) Better education consumers Healthy economy 3-14

Q. 3. What are the aspects of the social impact of advertising?

3-16 Social Impact: Criticisms Short-term Manipulative Arguments Long Manipulative Arguments

Q. 4. What are the components of the short-term manipulative arguments?

3-18 Social Impact: Criticisms Short-term Manipulative Arguments Deception Unfair Practices Puffery False promises Incomplete descriptions False comparisons Bait-and-switch Visual distortions False demonstrations False testimonials Partial disclosure Small-print qualifications

3-19 An Example of Puffery Claiming a Yamaha outboard actually leave a trail in storm- lashed waters is legal because it is unbelievable

3-20 An Example of Puffery Claiming Tabasco hot sauce causes corn kernels to pop is legal because it is unbelievable

Q. 5. What are the components of the long manipulative arguments?

3-22 Social Impact Criticisms Promotes materialism Incomplete information External societal costs Manipulation Long-term Macro Arguments Effects on Value System

3-23 Proliferation of Advertising Too much Clutters the different mediums Nuisance for customers Lower effectiveness for advertisers North American problem

3-24 Stereotyping Stereotyping affects: Minorities Women Immigrants Disabled Elderly Others Avoiding stereotypes = embracing cultural diversity

3-25 Insensitivity Whether or not an ad is labeled insensitive depends on Subjectivity Geography

Social Impact in Perspective Negative Incomplete information Creates unwanted externalities (e.g. interferes with free press) Biased Positive Contributes to growth and prosperity Rich information source Offers information not found in other sources 3-26

Public service announcement from Abbott Mead Vickers BDDO Insert photo 3.9, p.66 “Think! Slow down” PSA Position = 2.7” horiz., 1.5” vertical Size = 4.6” TALL Resolution = 300 dpi Social Responsibility and Ethics

Public service announcement from the Brain Injury Association of America Insert photo 3.13, p. 71 Towel snowboarding ad Position = 2.9” horizontal, 1.5” vertical Size = 5.7” WIDE Resolution = 300 dpi Social Responsibility and Ethics

3-29 An advertiser can act unethically or irresponsibly… without breaking any laws!

3-30 Social Responsibility and Ethics Public service announcement from the Ad Council about Multiple Sclerosis

Q. 6. Define Ethical Advertising.

3-32 Ethical Advertising Doing what the advertiser and the advertiser’s peers believe is morally right in a given situation.

Q. 7. Define Social Responsibility.

3-34 Ethical Advertising Doing what society views as best for the welfare of people in general or for a specific community of people.

3-35 Social Responsibility and Ethics Promote well-being Promote harmony, stability Influence elections Draw crowds to events Responsible advertising can... Ethical = morally right Socially Responsible = society views as best

3-36 Interrelated Components of Ethics Traditional actions of people in a society or community Philosophical rules society sets to justify past or future actions Attitudes, feelings, and beliefs of personal value system

Q. 8. What are the levels of ethical responsibility?

3-38 Levels of Ethical Responsibility

Q. 9. How does the government regulate advertising?

3-40 How Government Regulates State Governor, attorney general, various departments Municipal Mayor, city manager, police chief, courts, city attorney National Legislative, executive, judiciary

3-41 Pitfalls of International Regulation Varies from country to country Restrictions on what is said, shown, done Bans on specific products Time slot restrictions Bans on coupons, premiums, tie-in offers Prohibition of paid placements in shows Arbitrary rulings Pre-approval requirements

3-42 Current U.S. Regulatory Issues Supreme Court: “speech” or “commercial speech” Tobacco Controversy Advertising to Children Consumer Privacy

3-43 Speech: Central Hudson Test Does the commercial speech at issue concern a lawful activity? Will the restriction of commercial speech serve the asserted government interest substantially? Does the regulation directly advance the government interest asserted? Is the restriction no more than necessary to further the interest asserted?

Q. 10. What are the various federal advertising regulatory agencies?

3-45 Federal Regulation: Agencies FTC Deceptive, unfair, comparative ads FDAFCC Patent & Trademark Office Library of Congress Nutritional Labeling & Education Act (NLEA) Broadcast media licensing Intellectual property Copyrights “works of authorship”

3-46 Federal Regulation: Trademarks Coca-Cola’s trademark look is retained through use of similar letterforms and style, even with different alphabets

3-47 State & Local Regulation Printer’s Ink guidelines: untrue, deceptive, misleading National marketers comply with states’ laws Local government regulation: city and county consumer protection agencies “Little FTC” consumer protection acts

Q. 11. What are the various nongovernmental advertising regulatory agencies?

3-49 Nongovernment Regulation Better Business Bureau (BBB) National Advertising Review Council (NARC)  National Advertising Division (NAD)  National Advertising Review Board (NARB) Regulation by the media Regulation by consumer groups Self-regulation by advertisers

3-50 Self-Regulation: Agencies & Associations Advertising Agencies Research and verify claims and comparative data before use Liable for misleading/fraudulent claims May use in-house legal counsel Industry-Wide Associations American Association of Advertising Agencies (AAAA) American Advertising Federation (AAF) Assoc. of National Advertisers (ANA)

3-51 Self-Regulation: AAF Principles