Issues in Advertising: The Economics of Persuasion

By David G. Tuerck | Go to book overview

ADVERTISING REGULATION
AND THE CONSUMER
MOVEMENT

Robert Pitofsky

Regulation of false and unfair advertising was authorized at the federal level in 1914 when Congress enacted the Federal Trade Commission Act, declaring unlawful "unfair methods of competition."1 Before the 1960s, government regulation of national advertising was sporadic and weak, frequently instigated by competitive (as opposed to consumer) interests, and often based upon arbitrary and literalistic standards of accuracy.2

The last decade has witnessed sharply increased government efforts at regulating advertising and significant departures from earlier approaches--more cases, new theories of truth and relevance, and imposition of more drastic remedies against violators. Much of this augmented regulatory activity reflects pressures generated by the "consumer movement," with many of the new cases, rules, and programs designed to require or encourage dissemination to consumers of accurate and relevant product information they can use to make informed choices among competing brands.

I believe a solid case in economics and law can be made in favor of government regulation of truth-in-advertising. Of course, ill-conceived regulation will suppress or diminish useful information in the market- place, and generate unjustifiable costs. New regulatory approaches, and specific programs and cases, will be justifiable only if linked securely to an appreciation of the legitimate role of advertising in the free market process. I believe most recent advertising regulation efforts meet this test; many earlier federal efforts at regulation were wrongheaded and counterproductive precisely because they did not.

In succeeding sections, I will discuss (1) justifications for government regulation of advertising, (2) arguments that there is no proper

____________________
1
15 U.S.C. §45 (a) (1). A narrowing court interpretation of this provision was overruled by statute in 1936 by adding that "unfair or deceptive acts or practices in commerce" were also unlawful.
2
Richard Posner, "The Federal Trade Commission," University of Chicago Law Review, vol. 37 ( Fall 1969), pp. 71-78, and section entitled "Deceptive Comparative Price Advertising," in this paper.

-27-

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Issues in Advertising: The Economics of Persuasion
Table of contents

Table of contents

  • Title Page iii
  • Major Contributors v
  • Contents ix
  • Introduction 1
  • Acknowledgments 11
  • Part One Issues in Regulation 13
  • Advertising and Legal Theory 15
  • Advertising Regulation and the Consumer Movement 27
  • Commentaries 45
  • Part Two Advertising and the Firm 69
  • Towards a Theory of the Economics of Advertising 71
  • Introduction 71
  • Optimal Advertising: An Intra-Industry Approach 91
  • Conclusion 111
  • Technical Appendix 112
  • Commentaries 115
  • Part Three Advertising as Information 131
  • Advertising as Information Once More 133
  • Appendix A: Derivation of the Relationship Between a and P 156
  • Appendix B: Data Sources 158
  • Advertising, Information, and Product Differentiation 184
  • Commentaries 193
  • Four Part Advertising, Concentration, and Profits 215
  • Advertising Intensity and Industrial Concentration- an Empirical Inquiry, 1947-1967 217
  • Conclusions 249
  • Advertising and Oligopoly: Correlations in Search of Understanding 253
  • Appendix A 262
  • Appendix B 263
  • Commentaries 267
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