Economics for Today 9th Edition by Irvin Tucker

Exercise 3

SOCIAL NETWORKING SITES: THE NEW ADVERTISING GAME
Applicable Concept: product differentiation
A key characteristic of the market structures discussed in this chapter is that they use advertising to promote product differentiation, which is a form of non-price competition. The television commercial is considered the most effective method of mass-market advertising. This explains why TV networks charge such high prices for commercial airtime during prominent events, such as the Super Bowl. However, the days when television commercials dominate the advertising world could be fading away. Don't want to be bothered by those advertisements? It's easy: Just press the fast-forward button on the remote of a digital video recorder (DVR). Advertisers are therefore competing to get the attention of consumers by tapping into the popularity of such social networking sites as Facebook, Twitter, Google Plus, and YouTube. These sites connect individuals who interact through personal profiles, games, video clips, and more. There are also niche sites focused on very specific activities for a hyper-targeted audience. For example, Dogster.com is a site for dog lovers and Zappos.com is a popular site for women's and men's shoes. ProductWiki is a resource for shoppers. It gives access to product reviews and lets you compare prices. Other new forms of advertisement include ads on apps, such as Pandora (music), used on iPhones, iPads, and smartphones.
The challenge for Web economy entrepreneurs is to earn profits by differentiating their product and creating innovative ways to include advertising. The search engine is a highly successful business model. If someone googles for golf clubs, sponsored links for golf clubs appear on the screen. Social networks provide the prospect of tailoring ads to people's specific interests. Now suppose a golf club company pays Facebook, the crown jewel of social networking, for a page where you and your friends can register and play a game of video golf. What does the company get out of it? A database of tens of thousands of names, all potential customers. Another form of advertising is called "retargeting" ads. Suppose you browse a swimsuit on Nordstrom.com and then an ad for this swimsuit shows up on your Facebook page. Do users enjoy personalized ads or are they alienated by such intrusive tracking?
Some ideas are not winners. Facebook implemented a new approach that informed friends whenever a member purchased something from online retailers. Consumers protested this was an invasion of privacy, and the program was abandoned. Now consider this idea: Imagine being at a concert and text messaging a shout-out to your friends. Your message appears during the concert next to the stage on a big screen with a large ad from a company. Is this imposing a negative externality that distracts others in the audience from the performance? And in 2012, GM decided to cancel its advertising because it thought Facebook ads had little effect on car purchases.
Advertising is tasteless, offensive, and a nuisance that wastes resources. Give three arguments against this idea.