Advertising alerts consumers to the existence of options they didn’t know they had.
In a world where many feel that advertising has become increasingly information‐free and somewhat crude (e.g., do we really need toilet paper commercials that talk about “breakthrough?”), mounting a defense of advertising is something of a challenge. But there are many good things about advertising, especially about the indispensable role it plays in the competitive market process. I want to focus on one of those by way of a story about Tide Dry Cleaners.
I recently discovered (note that word) that Procter & Gamble, the company that makes Tide laundry detergent, has opened up dry cleaners branded with Tide. They’ve been around for a few years, but P&G has recently started a major expansion into several new cities, including the Indianapolis area, where I live. In fact, one is opening just a couple of miles from my house.
This development is economically interesting for a number of reasons. One is that it’s a great example of how to take a well‐known and well‐liked brand and expand its reach through new initiatives. Once Tide was just a brand of laundry detergent. In the clean‐up after Hurricane Katrina, P&G put a bunch of washers and dryers on tractor trailers and went around the Gulf Coast offering free laundry services to folks who could not use their own equipment or access a laundromat. This program was called “Loads of Hope” and was clearly branded with the Tide logo. This was incredibly successful and since Katrina, the Loads of Hope trucks have appeared at natural disasters all over the country.
The Tide Loads of Hope program showed P&G that the Tide brand could be deployed for all kinds of projects, and it was a natural to go from mobile laundry services to brick‐and‐mortar ones by creating the Tide Dry Cleaners franchise around 2010. What’s also interesting here is how P&G went from a seller of just the inputs into clean laundry to a provider of the services and machinery as well. It’s a great story about leveraging a brand and expanding the scope of the business. And from all reports, the Tide Dry Cleaners do a great job, and the expansion suggests they are profitable as well.
So what does this have to do with advertising? Let me tell you about how I discovered the existence of the new Tide Dry Cleaners here in Fishers.
Like many other suburbanites, I get lots of coupons in the mail every week. It’s worth a few minutes to flip quickly through those mailers and see if there’s ones for restaurants we frequent, for example. In doing so recently, I came across a large one for the new Tide Dry Cleaners offering 15% off your first purchase. I had no clue Tide Dry Cleaners even existed until that moment. It wasn’t that I didn’t know they had local outlets, because that question could be easily answered with a search. Instead, in the language of Austrian economics, I was beset by structural uncertainty – I didn’t know what I didn’t know. When you don’t know what you don’t know, you can’t go looking for it.
The ad for the new store alerted (note that word, too) me to the existence of something I otherwise would not have known. This is one of the key roles of advertising. It’s not that it provides information about the product or service in some objective sense, but that it can make us aware of opportunities of which we would otherwise be ignorant. This, among other reasons, is why advertising is not wasteful or unnecessary as many critics have alleged. It’s also a defense of what we might call “low‐information” advertising. That coupon simply needed to have the large picture of the Tide Dry Cleaners store to serve its major purpose in alerting me to its existence.
Historically, economists have been skeptical about the value of advertising. In the most simple version, there is no reason for it to exist in the standard model of perfect competition. Among the assumptions of that model is that all goods have the same features and quality, that prices are given and cannot be changed, and that everyone has perfect relevant knowledge. In such world what purpose could advertising possibly serve? There’s no information about the product to talk about since all products are the same and everyone knows everything about them. There’s no way to offer a coupon because prices are given by “the market” and individual sellers have no power to change them. As long as economists accept the model of perfect competition as their standard of comparison, advertising will always seem wasteful.
If you flip this argument the other way, it implies that where advertising does exist in the real world, it would be due to deviation from the perfectly competitive model and therefore evidence of some degree of monopoly in the economy. For example, the model of so‐called “monopolistic competition” relaxed the assumption of product homogeneity, allowing sellers to differentiate their products in various ways. Think of the different features on different models of smartphones. In this world, advertising at least makes some sense. Now producers have some control over price and might want to make information known about their product. That said, this was still seen as comparatively wasteful as pushing the economy toward perfect competition would enable society to take the resources spent on advertising and use it for other things.
The problem with both of these models was ably noted by the Austrian school economist Israel Kirzner in his path‐breaking 1973 book Competition and Entrepreneurship . Both perfect competition and monopolistic competition are equilibrium models in which markets quickly settle in on one efficient (given the endowments and constraints) distribution of resources. One of the reasons for this is that both models make strong assumptions about knowledge such that there is no room for the sort of pure act of discovery that was involved in my realizing that Tide Dry Cleaners existed. Advertising might be able to provide information that actors could search for, knowing that the information is out there, but there can be no pure discovery in those models.
For Kirzner, the essence of the market process is the way in which entrepreneurs engage in such acts of pure discovery and thereby better coordinate the desires of consumers with the actions of producers. His classic example is the person walking down the street and noticing that apples are selling for $2 per pound on one side and $3 per pound on the other. Entrepreneurs are alert to these opportunities and will arbitrage that difference, paying more than $2 on the first side and selling at under $3 on the other. Notice how this improves both the sellers on the first side and the buyers on the second side. It brings the desires of both consumers and producers into closer coordination. In the limit, the competition that is inherent in entrepreneurship will drive the price of apples to the same price on both sides if all else is constant.
The moment of discovery where one realizes that there is this price differential, and that one can profit from it while also making the other parties better off, is the moment of entrepreneurship. At that moment, the person’s preexisting understanding of the economic world is shaken up and there is a whole new understanding of the means available to her to satisfy her various ends.
In a world where we are constantly facing the structural uncertainty of not knowing what we don’t know, entrepreneurship is central. And when we realize that consumers also don’t know what they don’t know, the role of advertising becomes clear. Entrepreneurs who want to sell their products have to make them known to consumers who might not have a clue they exist. Advertising is a way to help consumers discover things they didn’t know they didn’t know. Good consumers are good entrepreneurs in this way by being alert to opportunities for discovery, just as I was by looking through that coupon mailer. Alert entrepreneurs will create ads that play to the alertness of consumers to make them aware of their product or service and, one hopes, purchase it. In this way, advertising is central to the competitive market process, not just because it enhances sellers’ profits, but because it does so by also enhancing the surplus of consumers. They get products they want but didn’t know about, and that makes them better off.
This discovery function of advertising has little to do with its traditional informational content. Again, all I needed was the visual image of the Tide Dry Cleaners to make the point. The hardest part of opening a new business is getting consumers’ attention in a very crowded market, but it’s also the most important. It’s one reason why brand extension, such as putting the Tide brand on the dry cleaners, is such a common strategy. Consumers know and trust Tide, so not only is their attention grabbed, they are confronted with a brand they are comfortable with. Things like prices and hours and the science of their dry cleaning method aren’t necessary when the brand and image largely speak for themselves.
Looking at advertising this way helps us understand its value even when it isn’t traditionally “informative.” In an increasingly crowded market with so many products old and new, the economy of attention is key. Advertising allows others to pay the cost of enabling us to discover new opportunities for consumption. But we, as consumers, have to be entrepreneurial about such opportunities. Just as producers have to be alert to price differentials in order to capture pure profit, so to consumers have to be alert to new and improved products in order to capture additional consumer surplus. Advertising benefits alert consumers by spurring moments of discovery, leading consumers to react the way I did upon discovering Tide Dry Cleaners: “Who knew?!” Thanks to advertising, I now do.