Progress Snapshot

Volume 6, Issue 5 February 2010

The Hidden Benefactor:

How Advertising Informs, Educates & Benefits Consumers
by Adam Thierer & Berin Szoka*

Advertising is increasingly under attack in Washington. In fact, we’re busy finishing up a paper
with the working title: “The New Assault on Advertising: What it Means for the Future of Media
& Culture.” Among other things, the paper inventories the many ways in which policymakers in
Washington and elsewhere are stepping up regulation of commercial advertising and marketing
efforts—and highlights the common themes that unite them. Unfortunately, the report is
already over 50 pages long and we keep finding new threats to discuss!
This regulatory tsunami could not come at a worse time, of course, since an attack on
advertising is tantamount to an attack on media itself, and media is at a critical point of
technological change. As we have pointed out repeatedly, the vast majority of media and
content in this country is supported by commercial advertising in one way or another—
particularly in the era of “free” content and services.1

An Attack on Advertising Will Hurt Consumers

But there’s a more important reason to fear Washington’s new war on advertising: It will hurt
consumer welfare. That’s because advertising provides important information and signals to
consumers about goods and services that are competing for their attention and business.—and
that scarcest of all things in the modern world, consumers’ attention. Thus, advertising helps
solve an otherwise intractable information problem that would otherwise go unsolved without
advertising’s claims and counter-claims about competing goods and services.
Indeed, truthful advertising is itself an important type of speech that communicates relevant
information to the public. As Nobel laureate economist George Stigler pointed out in his now
legendary 1961 article on the economics of information, advertising is “an immensely powerful
instrument for the elimination of ignorance—comparable in force to the use of the book

Adam Thierer is the President of The Progress & Freedom Foundation. Berin Szoka is a PFF Senior Fellow and
Director of PFF’s Center for Internet Freedom. The views expressed in this report are their own, and are not
necessarily the views of the PFF board, fellows or staff.
1
See, e.g., Adam Thierer & Berin Szoka, Chairman Leibowitz’s Disconnect on Privacy Regulation & the Future of
News, Progress Snapshot 6.1, January 2010, www.pff.org/issues-pubs/ps/2010/pdf/ps6.1-Leibowitz-
disconnect-on-privacy-and-advertising.pdf.

1444 EYE STREET, NW  SUITE 500  WASHINGTON, D.C. 20005

202-289-8928  mail@pff.org  @ProgressFreedom  www.pff.org
Page 2 Progress Snapshot 6.5

instead of the oral discourse to communicate knowledge.”2 As leading advertising scholar John
Calfee has argued, “advertising has an unsuspected power to improve consumer welfare” since
it “is an efficient and sometimes irreplaceable mechanism for bringing consumers information
that would otherwise languish on the sidelines.”3 More importantly, Calfee argues:
Advertising’s promise of more and better information also generates ripple
effects in the market. These include enhanced incentives to create new
information and develop better products. Theoretical and empirical research has
demonstrated what generations of astute observers had known intuitively, that
markets with advertising are far superior to markets without advertising.4
In other words, advertising educates. It ensures consumers are better informed about the
world around them, and not just for the good or service being advertised. Advertising also
raises general awareness about new classes or categories of goods and services. It helps
citizens in their capacity as consumers to become better aware of the options and their disposal
and the relative merits of those choices. For example, a new survey by About.com found that
“While one-third of the online buyers who were aided by ads said they helped them save
money, the majority appreciated online ads for informing them about a product or service
previously unknown.”5
If anything, these numbers understate the vital importance of advertising to consumers, since
advertising is so ubiquitous in our capitalist world, it is like the air we all breathe: We rarely
notice it except when it annoys or bothers us. Given how deeply ingrained our cultural bias
against advertising, and how subtly advertising works to benefit consumers, it’s remarkable
that so many consumers realize that advertising empowers them by increasing total awareness
of the many choices available in the marketplace.

Commercial Speech Is Speech and Deserving of First Amendment Protection

For these reasons, the Supreme Court has made it clear commercial speech is deserving of First
Amendment protection like other forms of speech. In a series of key decisions over the past
four decades, the Court has highlighted the important role that advertising and marketing plays
in facilitating the flow of information that is beneficial to society. As Calfee notes:

2
George Stigler, The Economics of Information, 69 Jour. of Political Economy 213, 220 (June 1961). “Since Nobel
laureate George Stigler’s 1961 article on the economics of information, economists have increasingly come to
recognize that, because it reduces the costs of obtaining information, advertising enhances economic
performance,” note Howard Beales and Timothy Muris. “[W]hat consumers know about competing
alternatives influences their choices. Better information about the options enables consumers to make choices
that better serve their interests.” J. Howard Beales & Timothy J. Muris, American Enterprise Institute, State
and Federal Regulation of National Advertising, 7-8 (1993).
3
John E. Calfee, Fear of Persuasion: A New Perspective on Advertising and Regulation, 96 (Agora Association,
1997).
4
Id.
5
eMarketer.com, Online Ads Help Shoppers Save, Feb. 22, 2010, www.emarketer.com/Article.aspx?R=1007524
Progress Snapshot 6.5 Page 3

Constitutional protection for advertising is explicitly based upon the idea that
freedom to advertise brings benefits to markets generally, especially consumers.
The central argument in Supreme Court decisions overturning restrictions on
advertising is that consumers can benefit from a free exchange of information–
the ‘marketplace of ideas’ celebrated by authors and jurists since at least the
time of John Milton.6
“Both the individual consumer and society in general may have strong interests in the free flow
of commercial information,” the Court noted in its landmark 1976 decision in Va. Pharmacy Bd.
v. Va. Consumer Council.7 “As to the particular consumer’s interest in the free flow of
commercial information, that interest may be as keen, if not keener by far, than his interest in
the day’s most urgent political debate,” Justice Blackmun stressed in that decision. 8 Thus, the
Court concluded:
Advertising, however tasteless and excessive it sometimes may seem, is
nonetheless dissemination of information as to who is producing and selling
what product, for what reason, and at what price. So long as we preserve a
predominantly free enterprise economy, the allocation of our resources in large
measure will be made through numerous private economic decisions. It is a
matter of public interest that those decisions, in the aggregate, be intelligent and
well informed. To this end, the free flow of commercial information is
indispensable.9
The Court’s reasoning in its recent commercial speech jurisprudence, notes Media Institute
scholar Richard T. Kaplar, can be summarized with the following syllogism:
Economic concerns are as important to our society are as important as political
concerns. By extension, economic information is as important as political
information. Political information receives full First Amendment protection.
Therefore, economic information should receive full First Amendment
protection.10
Kaplar continued: “Truthful speech about lawful products and services deserve full First
Amendment protection. This is a simple proposition, but its implications for freedom of speech
extend far beyond advertising.”11

The Benefits of Advertising Reverberate Throughout the Economy

The beneficial effects of increasing commercial speech and information clearly reverberate
throughout the economy—even though the big picture is “anything but obvious to

6
Calfee, Id. at 107-8.
7
Va. Pharmacy Bd. v. Va. Consumer Council, 425 U.S. 748, 765 (1976).
8
Id. at 763.
9
Id. at 765 (emphasis added)
10
Richard T. Kaplar, Advertising Rights: The Neglected Freedom (1991) at 60.
11
Id. at 71.
Page 4 Progress Snapshot 6.5

consumers.”12 Smarter consumers make smarter choices. They search for better deals.
Products and prices become more competitive as a result—even for consumers who don’t
bargain-hunt. And the cycle repeats endlessly. This is particularly true for new products and
services, thus for promoting technological innovation, as Nobel Prize winning Economists
Kenneth Arrow and George Stigler noted in their landmark 1990 study of the benefits of
advertising.13 They point to the example of the microwave oven, introduced in 1967:
Amana [Corporation]’s initial advertising of its pioneering microwave oven
provided consumers with information on how such ovens work, what they can
do, etc. This created consumer demand for the product, which benefited
subsequent entrants, such as Litton and Panasonic. Advertising by these later
entrants was used to explain the benefits of their particular brands rather than
to explain to consumers the functions of a microwave oven: Amana’s advertising
had already provided general product information and helped create consumer
demand for the product.14
This process not only brings new products to market, but also helps upstart innovators
dethrone the regnant giants of industry, ensuring that competition remains dynamic and
fiercely rivalrous—all to the ongoing benefit of consumers.

Conclusion
These are the stakes for consumers in the “New Assault on Advertising,” as we’ll explain in our
forthcoming report. Government already plays a vital role in ensuring that advertising is
truthful and not misleading. But as advertising itself evolves to keep pace with technological
change, raising new concerns about privacy and the supposed manipulativeness of tailored ads,
further regulation will only serve to limit the provision of beneficial information to consumers,
potentially retard new product offerings and innovation, dampen price competition, and
indirectly punish media operations and content creators who rely on advertising as their
lifeblood.

12
Calfee at 115.
13
Kenneth J. Arrow, George J. Stigler, Elisabeth M. Landes & Andrew M. Rosenfield, Economic Analysis of
Proposed Changes in the Tax Treatment of Advertising Expenditures, (Lexecon Inc., 1990), available at
www.scribd.com/doc/27267813/Economic-Analysis-of-Proposed-Changes-in-the-Tax-Treatment-of-
Advertising-Expenditures.
14
Id. at 16.
Progress Snapshot 6.5 Page 5

Related PFF Publications

Chairman Leibowitz’s Disconnect on Privacy Regulation & the Future of News, Adam
Thierer & Berin Szoka, Progress Snapshot 6.1, Jan. 13, 2010.
Privacy Trade-Offs: How Further Regulation Could Diminish Consumer Choice, Raise
Prices, Quash Digital Innovation & Curtail Free Speech, Berin Szoka, Comments to the
Federal Trade Commission at the Exploring Privacy Roundtable, Nov. 10, 2009.
Regulating Online Advertising: What Will it Mean for Consumers, Culture & Journalism?
Berin Szoka, Mark Adams, Howard Beales, Thomas Lenard & Jules Polonetsky, Progress
on Point 16.22, Oct. 30, 2009.
Privacy Polls v. Real-World Trade-Offs, Berin Szoka, Progress Snapshot 5.10, Oct. 8,
2009.
Targeted Online Advertising: What’s the Harm & Where Are We Heading?, Berin Szoka &
Adam Thierer, Progress on Point 16.2, Feb. 13, 2009.
Online Advertising & User Privacy: Principles to Guide the Debate, Berin Szoka & Adam
Thierer, Progress Snapshot 4.19, Sept. 2008.
Comments of The Progress & Freedom Foundation In the Matter of Sponsorship
Identification Rules and Embedded Advertising, W. Kenneth Ferree & Adam Thierer,
Sept. 19, 2008.
Freedom of Speech and Information Privacy: The Troubling Implications of a Right to
Stop People from Talking About You, Eugene Volokh, Progress on Point 7.15, Oct. 2000.
A Taxonomy of Online Security and Privacy Threats, Eric Beach & Adam Marcus, Oct. 29,
2009.

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications
for public policy. Its mission is to educate policymakers, opinion leaders and the public about issues associated with
technological change, based on a philosophy of limited government, free markets and civil liberties. Established in 1993,
PFF is a private, non-profit, non-partisan research organization supported by tax-deductible donations from corporations,
foundations and individuals. The views expressed here are those of the authors, and do not necessarily represent the
views of PFF, its Board of Directors, officers or staff.

The Progress & Freedom Foundation  1444 Eye Street, NW  Suite 500  Washington, DC 20005
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