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The Economic, Social, and Regulatory Aspects of Advertising Chapter 02 Mc. Graw-Hill/Irwin Copyright © The Economic, Social, and Regulatory Aspects of Advertising Chapter 02 Mc. Graw-Hill/Irwin Copyright © 2012 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Learning Objectives • LO 1: Describe advertising’s impact on the economy. • LO 2: Learning Objectives • LO 1: Describe advertising’s impact on the economy. • LO 2: Examine the validity of various social criticisms of advertising. • LO 3: Explain differences between social responsibility & ethics in advertising. • LO 4: Describe how government agencies regulate advertising to protect both consumers & competitors. • LO 5: Discuss the activities of nongovernment organizations in fighting fraudulent & deceptive advertising. 2 -2

Corn Flakes & Michael Phelps • Issue: Phelps was photographed engaging in an illegal Corn Flakes & Michael Phelps • Issue: Phelps was photographed engaging in an illegal activity – Some Companies rescinded sponsorships others did not. – Which companies did the right thing? 2 -3

Issues in Advertising • Many Controversies about Advertising – Advertising is a highly visible Issues in Advertising • Many Controversies about Advertising – Advertising is a highly visible activity. – Companies risk public criticism & attack if their advertising is offensive or the products don’t measure up. 2 -4

The Economic Impact of Advertising • Advertising accounts for 2% of the US’s GDP The Economic Impact of Advertising • Advertising accounts for 2% of the US’s GDP – The level of advertising investment in a country is directly proportional to its standard of living. * • Advertising sets up a chain reaction of economic events – The effect is like a break shot in billiards: hard to predict, affecting many. 2 -5

The Effect on the Value of Products • Advertising gives brands added value • The Effect on the Value of Products • Advertising gives brands added value • Advertising creates associations that help consumers satisfy needs & wants • FTC/Supreme Court: Advertising increases competition & helps lower prices • Advertising can stimulate demand • Advertising doesn’t restrict competition 2 -6

The Effect on Prices • Important points on advertising costs & pricing – Advertising The Effect on Prices • Important points on advertising costs & pricing – Advertising is a small part of a product’s cost. – Advertising enables mass-production, which lowers the cost per unit of products. – Regulated industries see no price increase associated with advertising. When deregulated, advertising often causes lower prices. – In retail, advertising contributes to both higher & lower prices. 2 -7

The Effect on Consumers & Businesses – Primary Demand for a product category – The Effect on Consumers & Businesses – Primary Demand for a product category – Secondary Demand for a specific brand 2 -8

The Social Impact of Advertising • Advertising is visible & gets criticized frequently – The Social Impact of Advertising • Advertising is visible & gets criticized frequently – – – Is advertising deceptive and/or manipulative? Does advertising degrade our value system? Is there too much Advertising? Does advertising propagate stereotypes? Is some advertising unnecessarily offensive? 2 -9

Social Responsibility & Advertising Ethics • Where laws and regulation end, ethics begin – Social Responsibility & Advertising Ethics • Where laws and regulation end, ethics begin – Ethical Advertising means doing what the advertiser and advertiser’s peers believe is right – Social Responsibility means doing what society views as best for the welfare of the people or specific community 2 -10

U. S. Regulatory Advertising Issues • Freedom of Commercial Speech – Commercial speech is U. S. Regulatory Advertising Issues • Freedom of Commercial Speech – Commercial speech is protected. • The Tobacco Industry • Advertising to Children – Advertising should not intentionally deceive children. • Consumer Privacy – Increased interactive advertising has made this a growing consumer concern. 2 -11

Federal Regulation of the Advertising Industry • Many government agencies protect consumers – – Federal Regulation of the Advertising Industry • Many government agencies protect consumers – – – – FTC (Federal Trade Commission) FCC (Federal Communications Commission) ATF (Bureau of Alcohol, Tobacco, and Firearms) USPS (US Postal Service) FDA (Food & Drug Administration) LOC (Library of Congress) US Patent and Trademark Office • Many state & local governments also regulate 2 -12

State & Local Regulation of the Advertising Industry • All states have “little FTC State & Local Regulation of the Advertising Industry • All states have “little FTC acts” – State legislation for advertising is often based on the truth-in-advertising statute developed by Printer’s Ink. – Any maker of an ad found to contain “untrue, deceptive, or misleading” material is guilty of a misdemeanor. – Often states work together to investigate & prosecute violations – Many localities also have consumer protection agencies. 2 -13

Nongovernment Regulation • • • The Better Business Bureau (BBB) Media Regulation The National Nongovernment Regulation • • • The Better Business Bureau (BBB) Media Regulation The National Advertising Review Council (NARC) Consumer Advocate Groups Self-Regulation 2 -14

International Advertising Regulation – Foreign Governments often regulate differently than the United States – International Advertising Regulation – Foreign Governments often regulate differently than the United States – Most countries are more restrictive – Different countries have different legal environments 2 -15