EC231 Industrial Economics (Strategic Behaviour) Essay
Grade: 2.1 (68%)
On topic of advertising
Question:
The government has been introduced legislation (e.g. the Online Safety Bill) to address concerns that online content, including advertising, contributes to problems such as obesity, suicide...
Question 2:
The government has been introduced legislation (e.g. the Online Safety Bill) to address
concerns that online content, including advertising, contributes to problems such as
obesity, suicide and problem gambling by targeting vulnerable consumers. Existing
regulations do not extend to social media and other online sources, especially those
using algorithms to match contents to individuals. To what extent should online targeted
content be considered advertising in the legal sense? In what ways might it be more or
less problematic than other forms of advertising? Try to consider examples of
informative and persuasive advertising in your answer and clearly identify the market
failure(s) involved.”
In the digital age, we observe a boom in online advertising for merchants to promote their
products. Global expenditure numbered $452.02 billion in 2022, marking a 15.6% rise from
2021 (Lim, Sung and Hong, 2023, p. 1). The advancements in technology and algorithm have
enabled online content, including advertising, to target individuals with traits corresponding
to their content or products. This essay explores online targeted content by discussing its
classification to advertising and assessing its merits in informative and persuasive forms.
Online targeted content deploys advanced online tracking and profiling technology to obtain
website and social media users’ behavioural insights and tailor products to suitable customers
(Aiolfi, Bellini and Pellegrini, 2021). This process involves gathering, disseminating and
using personal data, which has provoked controversy about privacy (Lim, et al., 2023). The
UK government also recognises that online targeted content carries risks concerning its
contents, media placements and targeting, especially for vulnerable groups. Therefore,
classifying online targeted content into advertising in the legal sense allows current
regulations, e.g., the Online Safety Bill, and government practices, e.g., the Online
Advertising Program, to control ads' content and delivery and address privacy concerns
(Conway, 2022). This classification protects consumers and the market when online targeted
content reduces social welfare and creates more harm than untargeted advertising.
Online targeted advertising could be considered informative when they focus primarily on the
product’s facts and aim to increase customer awareness of its existence. Under this
circumstance, they often lead to constructive outcomes for customers, firms, and society.
Compared with traditional forms of advertising, such as print or TV, informative online
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, targeted advertising tends to be more effective in reaching potential customers through its
targeted matching mechanism. For instance, a typical recommender system on an
e-marketplace advises customers of products they are most likely to purchase or browse
(Resnick and Varian, 1997). As online targeted content, recommender systems deploy various
information sources, like browsing history or item content, to predict customer preference
(Li, Chen and Raghunathan, 2016). The informative role of the recommender system signals
to customers about the existence of a product they are unaware of (Tam and Ho, 2006). This
signalling process often leads to customers making more informed decisions and firms
earning higher profits from a more extensive customer base (Li, et al., 2016). This impact is
empirically confirmed by an over 35% increase in Amazon sales due to the recommendation
(Hosanagar et al., 2014, p. 805). Customers can now vertically differentiate high-quality
products from low-quality ones by knowing more products and information, creating a
multi-price equilibrium for products of various qualities. This outcome suggests greater
market efficiency as prices entail properer information. The system’s matching algorithm also
lowers customer search and merchant advertising costs (Li, et al., 2016). Therefore,
informative online targeted content, to which the recommender system belongs, creates a
more cost-effective advertising method for firms, more optimal decision-making for
consumers, greater market efficiency, and thus, more social welfare than their traditional
counterparts.
In addition to informative advertising, online targeted content can be persuasive, which often
plays with customers’ emotions and functions cognitively to alter their tastes. Under this
circumstance, online targeted advertising could lead to destructive outcomes and market
failures. Compared with traditional persuasive advertisements, online targeted content is
more effective at identifying the vulnerable group to its contents, messages and product; thus,
they are more harmful and problematic.
Profile targeting, i.e., targeting customers according to social media profiles, can effectively
generate customisation of online advertisements on social network platforms (Köster et al.,
2015). One vulnerable group to this type of online advertising is children. They cannot react
critically to profile targeting as adults due to insufficient knowledge and experience.
Therefore, their purchase decisions are primarily based on their liking of the advertisement
rather than the perceived personal relevance to the product, suggesting greater room for
persuasive than informative advertising (Van Reijmersdal et al., 2016). For instance, fast food
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