Friday, November 02, 2007

Democrats Versus Advertising

Michigan democrats, apparently believing that there are still too many jobs in Michigan, have launched an attack on Michigan's drug companies.

Democrats seem to believe that drug companies spend too much money on advertising. They want to restrict how much companies can spend.

One common criticism of drug companies is that they spend more money on advertising than they spend on research. Suppose that's true. Let's review the economics of advertising.

A company can make the best product in the world, but no one will benefit from it if they don't know about it. By advertising, a company lets people know about a product that may benefit them. Thus advertising benefits society.

Democrats criticize advertising as if a dollar that is spent on advertising is a dollar that could be spent on research. But why do companies advertise? It's not because they like giving money to the media. It's because advertising attracts more customers and increases profits. Companies have more money because of advertising than they would otherwise. Restricting advertising would decrease the amount of money available for research, not increase it.

Advertising may sometimes encourage people to buy bad or unnecessary products, but whose fault is that? If a product is bad, the problem is the product, not advertising.

If a drug is unnecessary, why would people buy it? The problem here is not the free market, but government regulations. Government subsidizes employer-provided health insurance in the tax code, and so discourages people from controlling the costs of their own health care.

Drug companies save lives; government kills.


Matthew said...

Another point to bring about with advertising is that it protects the consumer. It is extremely difficult for a company to build a strong brand with a good reputation. That brand creates more certainty for the consumer that the product will work; they've heard of it, used it before, or know of someone else that has used it. Given a choice between generics, the consumer may not know where to turn.

The brand also creates a strong incentive for the company that owns the brand to keep quality at its highest. It can take years to build a reputation and one slip-up to destroy it for good. This is a powerful incentive for companies to keep their products free of defects and of the highest quality for the consumer. The consumer is thus protected more because they know that the brand brings with it a reputation, one that the company will make steps to uphold.

A curious thing about advertising is that most established companies don't necessarily like it. When tobacco ads were banned from most media years ago, big tobacco made hardly a peep relative to what they could have done. Why? Because the established companies knew that a ban on advertising made it nearly impossible for a new competitor to enter the market. After the ban, the existing companies could enjoy greater profits (no need to spend on ads just to keep their market share), and were safe from new competition.

Advertising allows a new competitor to enter the market. By limiting it, competition is hindered and the consumer loses.

Democrats seem to have a simplistic knowledge of how the market operates and have exhibited that time and time again in their failed attempts to micro-manage it.

Dan Roth said...

Now I'll be honest. I'm completely sick of TV and radio ads for drugs. I think they're on way too much. They're not even good commercials. And at times, they don't even really say what they're for.

But with that said, I think they have as much right to advertise as the next industry. And the Dem's logic that a dollar spent on advertising is a dollar that could be spent on research is obsurd. Do they get the point of advertising? It's to generate revenue through increased sales numbers, not to waste money. So in the long run, this should generate more money for research than if they didn't. Do they think commercials exist for the entertainment of the company? Through plenty of research, any big company determines if their ads are increasing sales. If they're not, they change their ad plan or end it.

But leave it to the Democrats. We're trying to attract new businesses to our state. Yet they come up with the great idea of taxing the drug companies. If I was a drug company, I'd probably start looking elsewhere if I heard about this.

Adam said...

If passed, would this become a first amendment issue?

Matthew said...

If so, I think the FCC is in trouble...