Why do firms label their products to say they have been advertised on TV when this information may seem irrelevant and doesn’t appear to convey a message to the consumer about the quality or function of the good?

Well in fact, such a practise, does convey a message to consumers. At least about the quality. To advertise on TV firms have to spend thousands if not millions of pounds to secure an advert slot. To spend this much money on promoting and marketing a product it shows that the producers are confident that the product will sell well, and to do this it must be worthwhile and of a high quality. Similarly consumers might believe that if a company can spend so much money on advertising then it must also have spent a lot of money on R+D, and using high quality materials when producing the product.

Furthermore some consumers might be under the impression that only credible and honest firms would be allowed to advertise on TV due to government regulation. This may be one reason why firms decide to advertise on TV – to overcome the asymmetric information problem of consumers not knowing whether the product is of good quality and is durable.

This practise was also adopted by banks when deciding to build large and fancy buildings. At the time, people were afraid to deposit their money with a bank unless it was a large renowned bank that everyone could trust. This was because there was little regulation or a deposit guarantee scheme (schemes whereby the government will pay you up to a certain value of money of yours savings if your bank ever looses it) meaning people had little trust with banks. Therefore it was hard for firms to enter the banking market because there was no way they could prove to people that they wouldn’t rip people off. This is an asymmetric information problem – the bank knows they are a credible firm and have good intentions but the savers have no way of knowing whether the bank will just steal their money and run-off. In order to overcome this problem banks built large fancy buildings which were very expensive. This showed that a.) they were going to stay in the building (and avoid the problem of pop-up shops or pop-up banks, where a bank opens in a cheap little shop, takes savings, and then disappears in the morning) and b.) they had enough money to cover their deposits if they could afford to build such expensive buildings.

Additionally firms may decide to put this message on their products in order to cash-in on their spending and not let other products have a free-ride effect. The only reason a firm would choose to advertise their product is because they want consumers to become aware that their product is available on the market and because they want it to be purchased. The more sales they receive then the more likely they are to be able to pay for the advertisement and other costs incurred in the production process and hopefully make a profit. Without such a label, people may see the advert on TV, rush out to purchase the good, but end up purchasing a substitute good (unaware that they haven’t purchased what they saw on TV, perhaps because the 2 products look similar). If this happens then the firm which spent the money on the advertisement looses out whilst the firms whose product looks similar (but may not have advertised) gets to free-ride and increase their profits. A simple ‘As seen on TV’ label makes consumers aware that it is this product they saw on TV and thus avoids confusion.

If you think of any further ideas please leave a comment below.