TANSTAAFL: What about “free” TV, radio and Internet content?

Another excerpt from my book in progress, Economics in Two Lessons. There’s a partial draft here if you want to read it in context. I could spend a lot more time on the topic of advertising, but much of the ground has been covered in Akerlof & Shiller’s latest Phishing for Phools. As always, both praise and useful criticism are very welcome.

TANSTAAFL and advertising
We saw in earlier that the ‘free lunch’ provided by saloons wasn’t really free in terms of opportunity cost. Rather, consuming the lunch involves forgoing the opportunity of buying cheaper beer at a saloon where lunch is charged for separately

The same point applies to ‘free’ services provided by governments and financed by taxation revenue. The opportunity cost is the private expenditure forgone to pay taxes. This is the point being made by drivers with TANSTAAFL bumper stickers, even if many of them might be unhappy about paying to use ‘free’ public roads.

There are, however, lots of other examples of services provided free of charge by for-profit corporations. These include radio and TV broadcasts, Internet services like Google, Facebook and Twitter and sponsorship for sporting and cultural events.

Obviously, TV and radio stations, like Google and Facebook, are funded mainly by the sale of advertising. Corporate sponsorship is based on the perception that it will create a favourable impression of the company concerned, which is a kind of advertising. How does our analysis apply to advertising?

In thinking about advertising in TV and similar media, we can easily dispense with the claim sometimes put forward by industry advocates, that such advertising provides consumers with useful information. If this were true, firms would not need to pay TV networks or Internet companies to broadcast the ads.

As is shown by the sales of specialist magazines of all kinds, consumers are willing to pay for useful information about consumer products. But no one will willingly consume ordinary ads unless they are packaged with a program they want to watch, or a webpage they want to view.

In fact, the original free lunch provides a much better analogy. Eating a meal or snack, particularly a salty one, increases the desirability of a cold drink, and the bar is there to provide it.

Similarly, advertisements work because watching an ad increases the desirability of buying the associated product. This may be because the ad attaches desirable qualities (such as sophistication or sex appeal) to the product or because it engenders dissatisfaction with the alternatives we are currently consuming.

In terms of opportunity cost, it does not matter whether an ad works positively or negatively. Either way, the opportunity cost of alternative products is increased relative to the value of the product being advertised. In the standard terminology of economics, a successful ad is complementary (in consumption) with the product being advertised.

In terms of our happiness, though, there’s a big difference. The net effect of advertising is almost certainly to reduce our satisfaction with the things we buy, because most of the ads we see are designed to make us switch to something else. And of course, the things that are not advertised, such as quiet leisure time with family and friends, where no goods and services are required and no money is spent, are downgraded even further.

Market prices tell us about the opportunity costs we face, although the cost, like that of the original free lunch, is hidden. We can choose not to watch the ads (and the programs with which they are bundled), and buy the advertised ‘brand name’ products. Alternatively, we can avoid the ads and buy cheaper alternatives, which don’t include the cost of advertising.

The third possibility is that of watching the ads, but buying the cheaper products anyway. If ads work as they are supposed to, this should induce a similar feeling similar to that of eating salty bar snacks but not buying a drink to go with them. That is, we should feel less satisfied with our choice than if we had not viewed the ads for the brand name product, perhaps so much so that we change our minds and buy the advertised product instead.

Many readers will (like the author) probably judge that they are too strong-minded to be swayed by advertising, particularly the uninformative puffery that we get from mass media. But the continued market dominance of advertised name brands suggests that this is an illusion, similar to the one that leads around 80 per cent of us to believe we are better than average drivers.

Opportunity cost is as relevant to advertisers as it is to consumers. In particular, opportunity cost explains why some kinds of goods and services are commonly bundled with advertising, while others are not. The opportunity cost of producing a TV show or an attractive website can be substantial. But once a given program or website has been produced, the opportunity cost of allowing access to it is small (often less than the cost of restricting access).

In these circumstances, bundling the program with advertising may be the only way to cover the fixed costs of production. If so, the availability of the package as a whole makes us better off compared to the alternative, at least on the (strong) assumption that we carefully consider the hidden cost of the ‘free lunch’ we are being offered.

The problem is more complicated when there are alternatives, such as public funding for broadcasting, which might be financed (as it was for a long time in the UK and Australia) by a license fee for television sets. Choice is maximised when both methods of funding are available, but as a matter of political practice, advertising-funded commercial broadcasters will lobby to have publicly funded alternatives shut down or forced to take ads.

The Internet has shown the power, and the limitations, of a third alternative, that of voluntary provision by individuals (as with blogs) or by large co-operative groups (as with Wikipedia). We’ll discuss this more in Lesson 2.

Finally, it’s worth considering the case when we are forced to consume the advertising whether we want to or not, and without receiving any benefit. The most obvious example is that of highway billboard advertising [as distinct from informative signs regarding the services available at a given exit].

The case where the right to put up a billboard is controlled by (for example) a highway authority, and advertisers have to pay is essentially the same as that of ‘free’ TV and radio. Road users pay part of the cost of providing the highway by consuming ads.

By contrast, in the case where neighbouring property owners can display billboards, neither the road users nor the providers get any benefit. In effect, the owner of the billboard is imposing a cost without any intervening market transaction. In the technical jargon of economics, this is a ‘negative externality’ (we’ll look more at this in Section …).

35 thoughts on “TANSTAAFL: What about “free” TV, radio and Internet content?

  1. @Ikonoclast

    My fridge is famous among my aspirational rellies for it’s age and it’s disgusting external appearance and it doesn’t even make ice cubes!!! – but the seals are still fine and my electricity bill is still lower than that of the ‘average’ family of our size. I might paint it one day with flowers and butterflies.

    I bought it the day before my second son died in a motorcycle crash over 20 years ago so it has sentimental value and it will be a very sad day when it dies.

  2. @Julie Thomas
    Although (for those who place high importance on energy efficiency) it is worth investigating updating some appliances. Clothes dryers in particular (yeah, I know, we shouldn’t use them) utilising heat pumps are considerably more efficient compared to the older heating element types.

  3. I think JQ that your bold launch into advertising is probably technically solid from the opportunity cost perspective but a little lopsided from other perspectives. There are lots of advertising channels all with differing properties

    letterbox mail….paid for by the product manufacturers…..largely stores advertising themselves
    newspaper….. ads paid for by the advertisers….supports the paper’s production cost
    newspaper classifieds….paid for by the advertiser…to the benefit of the responder (jobs assets property)
    magazines…..paid for by the advertiser…supports production cost…to the choice benefit of the reader (from one small ad in a technical publication I spent $150,000 on a machine which is central to my business performance and the employment of 5 people, what is the opportunity cost there)
    billboards….paid for by the advertiser…..loss to the environment…brand advertising
    radio…..paid for by the advertiser….completely supports costs…to the choice benefit of the listener.
    television fto…. paid for by the high end advertiser…completely covers production costs and dominately supports some professional sports… very marginal benefit to the viewer
    television other….paid for by the user and the advertiser…supports Rupert Murdoch… a nett loss to the subscriber.
    television cable network shopping channels…what can I say
    internet…paid for by the advertiser….largely brand support…minimal effect on the internet user.

    It is a very mixed bag. Television advertising is a bad choice of model as it is highly distorted by sporting event access costs to the extent of making the medium substantially dysfunctional. unfortunately one of the most stable and efficient advertising systems, the classifieds, has been fractured by the internet and there is no clear future path here.

    Our lives are very much a sensory exploration experience from birth to death. We are wired to seek out new stimulation and this is the human condition that makes advertising work. But we also have a lifelong progression of need. This is what makes advertising beneficial. I personally doubt that the economics of advertising can be conveniently or simply parameterised when its performance is everything from total waste to employment expanding.

  4. @Ikonoclast

    Conspicuous consumption is an inevitable consequence of modern capitalism.

    What is interesting is the way the conspicuous consumption of ‘stuff’ has been extended into the realm of information production and consumption. The modern web browser allows us to consume massive amounts of information much of it useless of course and it would seem that the marketisation of information is leading to greater fragmentation and biased dissemination of information. ( R Taylor Arthur 2014 “Postmodernist and Consumerist Influences on Information Consumption, Kybernetes vol 43. Issue 6)

  5. I am a worse driver than the median.

    When my daughter got her learners permit, she tells me, each of her friends who had experience as a passenger when I was driving advised her not to have me teach her to drive.

    It’s good that she has friends who are concerned for her.

  6. @J-D
    I have no idea if I’m better or worse than the median, but I know I’m better than your typical ute driving tradey at 3pm on a Friday along a major arterial 🙂

  7. Apple’s recent move to allow ad blockers into the apps store has raised this question in a lot of on-line commentary. If you can block all ads, you can’t get ‘free’ content. Mind you, many free mobile games solved this problem years ago – pay a one-off fee for the premium (i.e. ad free) version.

    Also, some free online papers are so choked with ads that they chew both your data and your bandwidth. But many don’t want to pay the price of a paywall.

    Debate continues, no clear end in sight.

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