Advertising is at its core a prisoner's dilemma. If every competitor in a certain space puts in $100 in advertising, they can all expect $0 in returns. However if a single company put in nothing they would be in a worse place because their competitors' returns would automatically become higher.
It’s partially a prisoner’s dilemma. Advertising reduces search costs for buyers to a certain point, after which it raises them again due to a glut of similar messaging. There is a moderate point at which buyers are hearing about enough potential options and are able to conduct a more effective search for products/vendors/sellers, and the cost is reasonable for the sellers (it reduces their sales costs, gets their economy of scale beyond the threshold needed to viable produce and serve customers.)
Beyond that moderate point is where the dilemma sets in as each company wants to increase advertising until the additional return is no longer positive—-but if every company pushes to the same point, the additional return at that stopping point becomes negative.
Which is why I think push advertising is the wrong model for product discovery. Facebook has all the information to be the best shopping meta-search in the world. They could become the go-to place for product discovery usurping Amazon and Google if they just turned their ad platform around and let shoppers drive.
AliExpress has this flow almost perfected but they are ultimately still limited by the sellers on their site where Facebook wouldn’t be.
Certainly FB/Ali’s model is appropriate for many markets. There is still a perverse incentive since the publisher/market-maker doesn’t want to limit investment in advertising, but the degree to which campaigns can be measured makes it harder to hide the results of overspending.
A guy doing marketing for a travel company once told me they had to spend an enormous amount of money on Google, for their own brand. People would search "brand cityA cityB", but a competitor would buy the top spot. How much were the competitor willing to spend? Basically their whole margin for that sale, as it was still better than nothing. So this company had to match that.
So in the end Google makes more profit per ticket than the companies delivering the service itself.
The Slate Star Codex guy calls this a multipolar trap [1]. A market is in some equilibrium. Then, one person does something "expensive" to gain an edge on everyone else. Eventually, in order to remain competitive, everyone has to do that expensive thing, and the market settles on a new equilibrium where we're back to nobody having the edge but now everyone is paying.
Ouch. Never thought of it this way. I know it’s borderline anti-American — but when you have such compelling incentive structures at what point should we demand government regulation? If 80% of advertising is not helping consumers discover products — arguably the primary functional purpose of advertising — then isn’t this in a way an economic sickness wasting the resources and stifling innovation?
It's bizarre to me that the government hasn't stepped in to regulate/ban medical advertising in America. Nobody wants it – not consumers, not doctors, not even the drug manufacturers themselves.
Medical advertising is obviously heavily regulated, save for supplements.
Arguments specifically against advertising medical devices and drugs are patently absurd. Prescription drugs and medical devices are literally the only ad on TV that requires an expert with a decade of training and a fiduciary duty to you to approve it before you can purchase.
Bans on things that are deadly like unhealthy foods, or things with proven negative ROI and for which debt cannot be forgiven (student loans for liberal arts degrees) don't even enter the conversation.
There's at least one group that likes drug ads: the advertising industry. High-dollar clients with long commercials (to fit in all their required disclaimers), and they're probably the ones with the connections to the appropriate regulators.
Personally I absolutely despise drug commercials, there's not much that will make me change the channel, mute, or turn off the TV faster. Is there a more blatant display of the faults of capitalism?
>There's at least one group that likes drug ads: the advertising industry.
There's another group that likes drug ads: media corporations! Part of the reason big pham spends $billions on ads is to buy the support of the media giants.
It's not even attributable to "capitalism," per se, because the US and New Zealand are the only places on Earth where they are legal. I may be blinkered as to global laws, so maybe I'll just say the Western Earth.
I feel that there is different types of advertisement. Brand advertising isn't so much about acquiring new customers but about reassuring existing ones. Like I honestly feel car makers don't need to advertise on the web or TV, yet they do it anyway. I have the car I have and I'm not looking to buy another for 5-7 years, yet Toyota and Ford will advertise to me as if to say "I'm still here in case you change your mind." I can't imagine the ROI is particularly high, yet not doing would be worse since competitors would silence you out. At the same time M-B isn't advertising to sell you a car but to sell you the exciting lifestyle you're going to have in their car. You already bought or planned to buy their car they are only reassuring your decision.
While you personally are not buying a car, every day there are hundreds of people in any small city who buy a car, so it is important to advertise to them. You personally might never buy a car, but they don't know how to target people who are not buying a car "soon".
If neither Pepsi or Coca-Cola advertised I think its plausible their positions in the market relative to each other could be the same proportion they are now. However, it would make it easier for restaurants, grocery stores, etc. to go with non-brand sodas (that also don't advertise).
I mean a few restaurants in my city are trying the non-Coke/Pepsi thing but after chatting with an owner about it they said it was more expensive because the local brands don’t have the logistics network.
That might be true for products or services that people need and know. But what about new or less known ones? For example, I will buy a car and one car only. All the advertising is not going to make me buy two. However, for electronics, I might buy an additional TV or another tablet, or gaming console.
You mean zero-sum. Advertising is a zero sum game.
I can't find the tweet but someone referenced the fact that if you lump traditional and digital media together, the TAM of advertising has basically been stagnate for decades. We just think its grown because FB/Google/etc have gobbled it all up.
It's not quite true that advertising is a zero-sum game. There are economic benefits from increased competition, and from improvements in presented choice.
It is definitely true that the economic benefits don't accrue to the advertiser! And it's also true that the economic benefits decrease as advertising saturates. But it's still not zero.
Let me rephrase because I don't think you understand what part of the advertising industry I'm referring to as zero-sum.
Advertising is basically cultivation of people's attention. There is a finite amount of eyeballs/"time of eyeballs" in any given any day for their attention. If all advertisers are trying to capture this attention, it means that for every advertiser who is able to capture an eyeball, it means another advertiser loses the ability to capture the eyeball (hence why Google/Facebook ads are auction based).
How exactly does their logic not add up? This is actually a specific example of a prisoners dilemma taught in some intro to game theory classes, with the classic example being the tobacco companies
Well it assumes a zero-sum game from the perspective of the competitors. The combined advertising effort of all competitors could grow the entire pie that they each share. Even though their percentage of the pie stays the same, the magnitude of the slice could be bigger, and that improvement in magnitude could outstrip the advertising cost, thus making it worthwhile.
In heavily saturated markets (notably cigarettes as the main well known case study), advertising can be more zero sum than not. No model is perfect, but the prisoners dilemma model for advertising is at least useful in a couple well known cases.
> If every competitor in a certain space puts in $100 in advertising, they can all expect $0 in returns. However if a single company put in nothing they would be in a worse place because their competitors' returns would automatically become higher.
Assume competitors A, B and C and all put $100 each into advertising. That's $300 spent on advertising. Each competitor only has to earn $101 in sales to get > $0 returns. There is no theoretical limit on how much each competitor can earn in sales. Let's randomly say each company makes $500 in sales. That's a return of $400 per company. If a single company puts in nothing, they may likely earn less in sales, so let's say company A spends nothing on advertising but still earns $450 in sales, meanwhile B and C spend $150 on advertising and make $475 in sales. Company A gets a return of $450, and companies B and C get a return of $325 each.
Anyway, all this math is irrelevant. OP said each company should expect $0 in returns. Where does that $0 come from? There is no rule that says they will earn $0 in returns.
> This is actually a specific example of a prisoners dilemma taught in some intro to game theory classes
You are correct that prisoner's dilemma is taught in intro to game theory, but you are not correct that this is an example of it.
