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Recent debate between Denley and Angus could not have come at a better time. It made me think about economics, perfect oppurtunity because I was studying for my Economics exam at the time, well-done guys… Ahh Economics, I love economics. It's a science, but also philosophical. It can analyse, relies on measurements, and yet can’t reach to an all-encompassing solution. The free-market economy is the flagship of the concept of absolute free choice. However, markets may not always be efficient in providing you the optimum price, this leads us into the idea of market efficiency. Market efficiency relies on the fact that consumers will buy products based on their ability to increase their surplus…what is consumer surplus? It’s the positive difference between what consumers are willing to pay relative to market price. See Diagram 1, the blue shaded area is consumer surplus. Diagram 1 So we always assume in 99% of economic models that consumers will always to buy the cheaper good. So if firm A sells a good at $5 and firm B sells the same product at $3, ceteris paribus (all other factors being equal), the consumer will buy from firm B. This is considered to be rational economic thinking. Surely, consumers will buy a cheaper substitute good if available, after all, isn’t that the point of firm competition? Then why do we see people buy brand names over generic goods? Let’s take the groceries as an example. Most people would prefer to buy that good ol’ Sanitarium backed cereal over that Black & Gold or Home Brand cereals. Why is this so? Focus groups show that generic brands taste no different to brand names, yet even though generic products are cheaper, most consumers will buy brand names. This is because of a misconception that a brand name may be superior to the generic product. This is not always the case (although a higher price may be justified, e.g. higher quality). This form of inequity is due to advertising. Nike is better than New Balance, because the advertisement told me so. The subversive advertising of Coke and Macdonalds. If you drink Coke, you too can have a beach party! Advertisements do not concentrate on the factual information of a product and use it as a platform for competition for MOST goods. Nike is better than Adidas, because… so it could be argued that advertising makes markets inefficient because the perception of consumers is being altered, they no longer become concerned with the price, but with the brand name. Would you buy a Palsonic over a Panasonic? Pepsi or Coke? or Diagram 2 shows effect of a successful advertising campaign (which reduces consumer surplus). Notice the shift of the demand curve from D to D2. Diagram 2 However, it could be argued that advertising contributes to market efficiency by making consumers aware of the product. Without advertising, how would you know about new entrant firms into a market? How would you know about that stocktake sale at JB’s. Or the new model of Motorolas is out? Advertising (according to advertising firms) is a form of consumer information. Information is POWER. So does advertising encourage market failure? Never expect a yes or no answer for an economic question. Every economic solution involves a cost. Advertising does indeed make the market a bit inefficient, with brand-loyalty being an example of this. However, it does act as a form of consumer information. Therefore, a regulated advertising firm is a good compromise between the two extremes. Now, is the increase in ads during the cricket a sign of market failure? This is hard to say….are the social costs and benefits at equilibrium? How can we measure the enjoyment of cricket? We can measure the cost of the broadcast, as this consists of crew wages, broadcasting rights, air time, satellite rent (if an overseas event). But unless we can measure the benefit of watching cricket (preferably in dollar terms) it is hard to determine if this is indeed market failure. Cricket, as far as I know, does not provide any positive externality (any positive benefit to society). The consumer surplus for watching Cricket on free-to-air TV is widely varied. For the fanatics, it may be large (e.g. they are willing to pay for Foxtel if required) to the casual viewer (who are not willing to switch to Foxtel). Thus, if advertisement rates increase by a small amount, we may not see a spiral at all, because the demographic is so varied. The broadcasters are aware of this, they would never put an ad that cuts into the final over of an inning. They know how to balance the benefit of the viewers with production costs. Me personally, I find the cost of Fox Sports just to watch cricket far above the price I’m willing to pay to watch a few advertisements, but I’m one end of the cricket watching community. There is no final solution in economics, just a compromise. Enjoy watching ads? Online searchable advertisement archive Argument for generic drugs A Coke Summer Campaign