Economic Policy Analysis - Response Paper 1
Seah Shuqi Gabriel
An Economic Analysis of
Advertising and Bust Enhancement in
It was reported in the Straits Times on February 17th that advertisements from two companies offering bust enhancement services were to be blocked by the Advertising Standards Authority of Singapore (Asas) because they did not carry disclaimers stating that their results were not verified by scientific studies. This case raises pertinent questions about the role of advertising in a market economy, especially with respect to non-surgical bust enhancement, which has become increasingly popular in recent years, as a survey of advertisements in Singaporean newspapers will show. Chiefly: is advertising beneficial to society? Can it be economically justified?
In the short run, advertising is a fixed cost: no matter how much of
the good is produced, advertising costs remain constant since advertisement is
separate from the production process and not necessary for it. The profit
maximising firm produces at the output level where Marginal Revenue (MR) equals
Short Run Marginal Cost (SRMC) (see Fig 1), as long as the price it can get at
that output level equals or exceeds its Short Run Average Variable Cost (SRAVC).
Advertising is a fixed cost, so ceteris paribus it shifts the Short Run Average
Total Cost (SRATC) curve up to SRATC′. However, since the MR, SRMC and
SRAVC curves remain unchanged, the firm does not change its output decision,
and consumers are not any worse off than they were previously.
However the long run is a different case. No costs are fixed in the long run, so advertising shifts the Long Run Marginal Cost (LRMC) curve to the left, to LRMC′ (See Fig 2). This cuts the Marginal Revenue curve at a lower output level (Q′), and the firm accordingly sells this lower output at a higher price (P′). With a lower quantity supplied and a higher price, society would thus seem to be worse off. Is advertising then economically useless?
According to economic theory, this is not necessarily so. Advertising does make economic sense: by providing information to consumers, it makes markets work more efficiently, and lowers consumers’ search costs. Flipping through the Straits Times for their dose of daily news, consumers can view advertisements from the various bust enhancement companies and be apprised of their costs, details and results (from the testimonials in the advertisements), instead of having to call up the various outlets for details, go down in person to check them out and ask all their friends about their experiences and what they’ve heard about the various bust enhancement salons.
Additionally, in the long run, ceteris is not paribus – advertising affects the demand (and thus the marginal revenue) curve. Indeed if it did not, firms would not waste their money commissioning and putting out advertisements. With advertising, consumers are made aware of and enticed by the product; women previously unaware of bust enhancement are informed of it, and others who might not otherwise have gone for it are tempted into doing so. At each and every price level, more of the product is demanded, and the demand curve thus shifts to the right, and since the Marginal Revenue curve is dependent on it, it too shifts to the right. The new output and price levels depend on whether the shift of the Marginal Revenue curve exceeds the shift of the Long Run Marginal Cost curve: if the former shifts by more than the latter, output will be higher and price lower than before the advertising.
However, there is a flip side to advertising, which we can see in the case of the bust enhancement industry. Advertising can be spurious and deceptive: bust enhancement advertisements promising a bigger and fuller bust line, despite the lack of scientific evidence for their efficacy, for example, or a plethora of hidden costs not mentioned in advertisements. This asymmetric information can lead to market failure, but this is where the regulatory framework that is so vital for the smooth functioning of a market economy comes in.
Following 83 complaints from 2002 to July 2004 about bust enhancement programs, the Consumers Association of Singapore (CASE) worked to develop a revised advertising code, which came into effect on January 1st, 2005, which mandates that bust enhancement ads must carry disclaimers “stating that the promised results are not backed by scientific studies”. Companies must also ensure that testimonials from satisfied customers can be backed up. Those who flout these rules not only have to pay to amend their ads, they are also named and shamed. Consumers who have been cheated by errant companies may also sue them in courts. The empirical evidence is that the regulations have worked – a survey of the Straits Times (sans classifieds) from Monday, 14th February 2005 to Sunday, 20th February 2005 uncovered only 3 bust enhancement ads, whereas in 2004 there was at the very least one bust enhancement ad a day in the same newspaper.
Advertising also raises the question of consumer rationality. Standard economic theory is based on the assumption of consumer rationality: humans are homo economicus – Economic man, and try to maximise their utility at minimum cost. In this case, women want to optimise the appearance of their busts. However, doctors believe that there is no scientific evidence that non-surgical bust enhancement can result in permanent bust enlargement, and this point has been stated repeatedly in newspaper articles. Despite this, consumers still visit bust enhancement salons. What they are purchasing might be more hope than anything tangible. Perhaps, then, consumers are not as rational as standard economic theory assumes, and as economists would like to think, and this has implications for the mathematical models that most modern economic analysis relies on.
There is also the issue of consumer manipulation, as discussed by John Kenneth Galbraith in The Affluent Society. Advertisements do not just inform, they also persuade and manipulate. Advertising raises demand by intensifying wants and creating new wants; women who were previously satisfied with their busts might become insecure after viewing a bust enhancement ad. Some of the needs created or intensified by advertising might be deemed frivolous by some, and bust enhancement surely falls into this category.
However, in the final analysis, it is not clear that the government or a regulatory body should control or limit advertising on the basis of it being frivolous. Indeed, much of our modern economy is based on entertainment and frivolity. A study of economic history will also show that government failure is at least as disastrous as market failure, if not worse. What is important is that a regulatory framework be set in place to prevent errant advertisers from placing misleading or deceptive advertisements. If informed consumers persist in wishing to enhance their busts, why should anybody stop them?