<p>The business stealing effect of advertisements was detailed in</p>

<blockquote>
  <p>Gene M. Grossman and Carl Shapiro, "<a href="http://restud.oxfordjournals.org/content/51/1/63.short" rel="nofollow">Informative Advertising with
  Differentiated Products</a>",
  <em>The Review of Economic Studies</em>, Vol. 51, No. 1 (Jan., 1984), pp. 63-81.</p>
</blockquote>

<p>Intuitively, since the consumers attracted by advertising will be (in part) stolen from other firms, each firm imposes a negative externality on its rivals and will tend to invest too much in advertising.</p>

<p>This is offset, somewhat, by the fact that advertising improves the match between consumers and products by informing consumers about which products best suit their needs. Thus, contrary to the statement in the question, the level of consumption may well increase because consumers value the products the buy more highly on average.</p>

<p>Grossman and Shapiro build a model in which the business stealing effect always dominates so that the equilibrium level of advertising is excessive.</p>

<hr>

<p>Some factors not in the Grossman and Shapiro model that are likely to be important, and are detailed elsewhere in the literature:</p>

<ul>
<li><p>There is an <em>information overload</em> problem: if everybody sends many advertisements then consumers may be so overwhelmed with ad messages that they become unable to cognitively process them all and simply stop paying attention. This induces an additional externality because if a firm sends an extra message it will crowd the messages of other sellers out of the consumer's attention.</p></li>
<li><p>Advertisements can be persuasive: seing an ad can increase a consumer's (perceived) utility from a product. Depending on whether you believe this is a real change in the consumer's preferences or merely psychological trickery, this can either be a good or a bad thing. Depending on the market, both the persuasive and informative roles of advertisements seem to be important see, for example, <a href="http://users.ox.ac.uk/~econ0360/FerdinandRauch/dp1073.pdf" rel="nofollow">here</a>.</p></li>
<li><p>I agree with BKay that, in the case of billboards, there is likely to be an additional environmental externality.</p></li>
<li><p>To the extent that the ad platform (e.g. the billboard owner) has market power, there may be a monopoly distortion of the supply of advertising. In the UK, 80% of outdoor advertising is sold by three firms (JCDecaux, Clear Channel and CBS Outdoor; source: <a href="http://www.lgcplus.com/Journals/3/Files/2011/2/3/oft1304.pdf" rel="nofollow">http://www.lgcplus.com/Journals/3/Files/2011/2/3/oft1304.pdf</a>).</p></li>
</ul>

CC BY-SA 3.0
2015-03-12T10:58:26.920Z
2015-03-12T10:58:26.920Z
Ubiquitous
<p>It is an interesting question. Let me rephrase it slightly differently and then argue that <strong>we don't know</strong>.</p>

<h3>A Good effect, and a negative externality</h3>

<p>What you are saying is that advertisements have a negative externality. To some effect, they increase a firm's sales because customers were not aware at all about the product's existence or features. But to some extent, customers were aware that such products existed, advertisements merely redirected other firms customers to this firm. This second part is the negative externality.</p>

<p>As long as the first effect exists, <em>some</em> advertisement* is welfare optimal. As long as the second effect (the negative externality) exists, the competitive outcome is inefficient: We spend too much on advertisements. </p>

<h3>How much to much?</h3>

<p>We don't know. Proper scientific evidence includes randomization across some countries that affects the marginal costs of advertisement for their firms. We don't have (and probably never will) have this kind of data.</p>

<p>For partial identification (that is, will a marginal decrease of advertisement yield welfare gains) we need less - but I'm not aware of any study of this kind.</p>

CC BY-SA 3.0
2015-03-12T02:37:02.967Z
An important thing to note about competition in general is that it is in the short term sub-optimal, since it entails some firms making efforts which don't pay off, and other firms having to make efforts which would not have been necessary if the unsuccessful firms didn't exist, but in the long term competition (in general) can often help shift sub-optimal scenarios toward optimality.
supercat
CC BY-SA 3.0
2015-03-11T23:52:15.923Z
2015-03-11T23:52:15.923Z
FooBar
<p>I think BKay's answer is quite good. I do have something to add.</p>

<p>It is worth considering a key benefit to the consumer of billboards (and advertising in general). It can help a consumer search for a product or service advertised. The consumer will only take advantage of this product if it improves their utility. In this way, the knowledge imparted on the consumer by the billboard allows for an increase in utility. In general, an increase in utility is good for the economy. In this case, improving the mechanism of product search allows consumers to find their individual utility maximizing products. The producers also benefit because the best producers get more revenue.</p>

<p>The key assumption here is that a billboard allows a consumer to make a more informed decision.</p>

CC BY-SA 3.0
2015-03-12T00:53:14.170Z
2015-03-12T00:53:14.170Z
Jamzy
<p>While advertising can be zero sum, here are two additional dimensions you might want to consider. </p>

<p>Billboards, like other forms of advertising, can inform. In this way Ford can talk about their new 8 seat minivan while GM talks about the more fuel efficient engine of their latest model. This can result in happier customers who value their product better and are willing to pay higher prices for this more ideal product. </p>

<p>Billboards, in ways not paralleled by other most other forms of advertising, have a negative externality akin to pollution. When the NY Times decides to increase their number of advertisements slightly they bear the costs in customer unhappiness, giving them an incentive to adjust until the private costs and benefits of a marginal ad are equated. But not so with the billboard. The billboard is typically adjacent to public space, so if a nasty billboard ruins the scenery or obscures another billboard the billboard owner doesn't internalize those costs. Since the private benefits of ad revenue continue to accrue to the owner, this leads to too many billboards even if some level of billboard production would be socially desirable. </p>

CC BY-SA 3.0
2015-03-12T00:57:06.303Z
Regarding your pollution argument: Shouldn't property prices make up for that? As long as there is a market for the properties that billboards are built on, "Billboard free space" is not a public good like "clean air" is.
FooBar
CC BY-SA 3.0
2015-03-12T01:35:25.103Z
@FooBar, no. A property has significant effects on others, depending on its use. If I build a giant box, or a butterfly garden, those have different externalities. It's why almost all neighborhoods have a rule against obscuring line of sight need the street.
Paul Draper
CC BY-SA 3.0
2015-03-12T02:58:44.457Z
@PaulDraper: Making my point for me: You can "buy" neighborhoods and/or set up rules for them. You can't do that with air. There is excludability, hence billboards (or the lack thereof) are not a public good in the traditional sense.
FooBar
CC BY-SA 3.0
2015-03-12T03:11:59.517Z
@FooBar, while you can buy the **property**, the **view** is public, and not exclusive. Whether a box, a garden, or a billboard, the view is publicly visible and consumable.
Paul Draper
CC BY-SA 3.0
2015-03-12T12:52:32.617Z
@PaulDraper My point being: if a billboard decreases the property values of the adjacent properties, owners of the adjacent properties can, through transactions, end the existence of these billboards. Yes, there are free rider problems of those owners that do not pay, but unlike with a real public good, these issues are manageable, for example, as you rightfully point out, through neighborhood "clubs".
FooBar
CC BY-SA 3.0
2015-03-12T12:56:13.597Z
See also: Mad Men (aMC) S01 E01 "Smoke gets in yours eyes." Don Draper: Advertising is based on one thing: happiness. And do you know what happiness is? Happiness is the smell of a new car. It's freedom from fear. It's a billboard on the side of a road that screams with reassurance that whatever you're doing is OK. You are OK.
Orwellophile
CC BY-SA 3.0
2015-03-12T13:08:11.170Z
I completely agree in that it is not a private good. I only disagree in that it is a public good with exactly the properties of air pollution.
FooBar
CC BY-SA 3.0
2015-03-11T23:21:24.760Z
2015-04-07T19:53:25.740Z
2015-04-07T19:53:25.740Z
BKay
<p>Billboards cost money to make and don't really seem to significantly benefit anyone other than billboard-makers. A company c putting up billboards presumably increases profits from the resulting increased number of customers, but don't competing businesses' billboards decrease c’s profits by decreasing its number of customers? I don’t see why the total amount of consumption would change, so wouldn't the total amount of business remain roughly constant? So, are billboards economically beneficial or not? Why?</p>

CC BY-SA 3.0
2015-03-12T01:00:38.467Z
I think this question might be better tagged as a micro question. Doesn't have a lot to do with macro as far as I can tell.
Jamzy
CC BY-SA 3.0
2015-03-12T14:38:49.433Z
@Jamzy the microfoundations people would like to have a word with you
shadowtalker
CC BY-SA 3.0
2015-03-12T16:45:56.977Z
I'd be much happier if you changed the phrase in the title from the incomprehensible "good for the economy" to something with a clear meaning, like "welfare improving".
Steven Landsburg
<microeconomics><externalities><marketing>
Are billboards beneficial for the economy? Why?
Kelmikra
# Are billboards beneficial for the economy? Why?

(Asked by: username_0 on 2015-03-11)

Billboards cost money to make and don't really seem to significantly benefit anyone other than billboard-makers. A company c putting up billboards presumably increases profits from the resulting increased number of customers, but don't competing businesses' billboards decrease c’s profits by decreasing its number of customers? I don’t see why the total amount of consumption would change, so wouldn't the total amount of business remain roughly constant? So, are billboards economically beneficial or not? Why?

**Tags:** microeconomics, externalities, marketing

> **Comments:**
> **username_1**: I think this question might be better tagged as a micro question. Doesn't have a lot to do with macro as far as I can tell.  
> **username_2**: @username_1 the microfoundations people would like to have a word with you  
> **username_3**: I'd be much happier if you changed the phrase in the title from the incomprehensible "good for the economy" to something with a clear meaning, like "welfare improving".  

---

## 4 answers

### Answer by username_7 on 2015-03-11. Score: 7 | Accepted answer

While advertising can be zero sum, here are two additional dimensions you might want to consider.

Billboards, like other forms of advertising, can inform. In this way Ford can talk about their new 8 seat minivan while GM talks about the more fuel efficient engine of their latest model. This can result in happier customers who value their product better and are willing to pay higher prices for this more ideal product.

Billboards, in ways not paralleled by other most other forms of advertising, have a negative externality akin to pollution. When the NY Times decides to increase their number of advertisements slightly they bear the costs in customer unhappiness, giving them an incentive to adjust until the private costs and benefits of a marginal ad are equated. But not so with the billboard. The billboard is typically adjacent to public space, so if a nasty billboard ruins the scenery or obscures another billboard the billboard owner doesn't internalize those costs. Since the private benefits of ad revenue continue to accrue to the owner, this leads to too many billboards even if some level of billboard production would be socially desirable.

> **Comments:**
> **username_5**: Regarding your pollution argument: Shouldn't property prices make up for that? As long as there is a market for the properties that billboards are built on, "Billboard free space" is not a public good like "clean air" is.  
> **username_8**: @username_5, no. A property has significant effects on others, depending on its use. If I build a giant box, or a butterfly garden, those have different externalities. It's why almost all neighborhoods have a rule against obscuring line of sight need the street.  
> **username_5**: @username_8: Making my point for me: You can "buy" neighborhoods and/or set up rules for them. You can't do that with air. There is excludability, hence billboards (or the lack thereof) are not a public good in the traditional sense.  
> **username_8**: @username_5, while you can buy the **property**, the **view** is public, and not exclusive. Whether a box, a garden, or a billboard, the view is publicly visible and consumable.  
> **username_5**: @username_8 My point being: if a billboard decreases the property values of the adjacent properties, owners of the adjacent properties can, through transactions, end the existence of these billboards. Yes, there are free rider problems of those owners that do not pay, but unlike with a real public good, these issues are manageable, for example, as you rightfully point out, through neighborhood "clubs".  
> **username_9**: See also: Mad Men (aMC) S01 E01 "Smoke gets in yours eyes." Don username_8: Advertising is based on one thing: happiness. And do you know what happiness is? Happiness is the smell of a new car. It's freedom from fear. It's a billboard on the side of a road that screams with reassurance that whatever you're doing is OK. You are OK.  
> **username_5**: I completely agree in that it is not a private good. I only disagree in that it is a public good with exactly the properties of air pollution.  

---

### Answer by username_4 on 2015-03-12. Score: 1

The business stealing effect of advertisements was detailed in

> Gene M. Grossman and Carl Shapiro, "[Informative Advertising with
> Differentiated Products](http://restud.oxfordjournals.org/content/51/1/63.short)",
> *The Review of Economic Studies*, Vol. 51, No. 1 (Jan., 1984), pp. 63-81.

Intuitively, since the consumers attracted by advertising will be (in part) stolen from other firms, each firm imposes a negative externality on its rivals and will tend to invest too much in advertising.

This is offset, somewhat, by the fact that advertising improves the match between consumers and products by informing consumers about which products best suit their needs. Thus, contrary to the statement in the question, the level of consumption may well increase because consumers value the products the buy more highly on average.

Grossman and Shapiro build a model in which the business stealing effect always dominates so that the equilibrium level of advertising is excessive.

---

Some factors not in the Grossman and Shapiro model that are likely to be important, and are detailed elsewhere in the literature:

* There is an *information overload* problem: if everybody sends many advertisements then consumers may be so overwhelmed with ad messages that they become unable to cognitively process them all and simply stop paying attention. This induces an additional externality because if a firm sends an extra message it will crowd the messages of other sellers out of the consumer's attention.
* Advertisements can be persuasive: seing an ad can increase a consumer's (perceived) utility from a product. Depending on whether you believe this is a real change in the consumer's preferences or merely psychological trickery, this can either be a good or a bad thing. Depending on the market, both the persuasive and informative roles of advertisements seem to be important see, for example, [here](http://users.ox.ac.uk/~econ0360/FerdinandRauch/dp1073.pdf).
* I agree with username_7 that, in the case of billboards, there is likely to be an additional environmental externality.
* To the extent that the ad platform (e.g. the billboard owner) has market power, there may be a monopoly distortion of the supply of advertising. In the UK, 80% of outdoor advertising is sold by three firms (JCDecaux, Clear Channel and CBS Outdoor; source: <http://www.lgcplus.com/Journals/3/Files/2011/2/3/oft1304.pdf>).


---

### Answer by username_5 on 2015-03-11. Score: 1

It is an interesting question. Let me rephrase it slightly differently and then argue that **we don't know**.

### A Good effect, and a negative externality

What you are saying is that advertisements have a negative externality. To some effect, they increase a firm's sales because customers were not aware at all about the product's existence or features. But to some extent, customers were aware that such products existed, advertisements merely redirected other firms customers to this firm. This second part is the negative externality.

As long as the first effect exists, *some* advertisement\* is welfare optimal. As long as the second effect (the negative externality) exists, the competitive outcome is inefficient: We spend too much on advertisements.

### How much to much?

We don't know. Proper scientific evidence includes randomization across some countries that affects the marginal costs of advertisement for their firms. We don't have (and probably never will) have this kind of data.

For partial identification (that is, will a marginal decrease of advertisement yield welfare gains) we need less - but I'm not aware of any study of this kind.

> **Comments:**
> **username_6**: An important thing to note about competition in general is that it is in the short term sub-optimal, since it entails some firms making efforts which don't pay off, and other firms having to make efforts which would not have been necessary if the unsuccessful firms didn't exist, but in the long term competition (in general) can often help shift sub-optimal scenarios toward optimality.  

---

### Answer by username_1 on 2015-03-12. Score: 0

I think username_7's answer is quite good. I do have something to add.

It is worth considering a key benefit to the consumer of billboards (and advertising in general). It can help a consumer search for a product or service advertised. The consumer will only take advantage of this product if it improves their utility. In this way, the knowledge imparted on the consumer by the billboard allows for an increase in utility. In general, an increase in utility is good for the economy. In this case, improving the mechanism of product search allows consumers to find their individual utility maximizing products. The producers also benefit because the best producers get more revenue.

The key assumption here is that a billboard allows a consumer to make a more informed decision.


---

