Lose Lose Games

Once upon a time, when I began to study game theory, I came across a story that opened my eyes and my mind. It is an old story about the evil tobacco industry but please do not get frightened and stay with me just three minutes:

In the years before 1964, all tobacco companies in the United States of America advertised heavily on television. You could see actors, celebrities, and ex-athletes lightning up all the time. In 1964 the surgeon general issued the first official warning that cigarette smoking might be hazardous to public health. At first, the cigarettes companies were loath to carry the now-familiar warning label on their product. They feared, and rightly so, that carrying the warning would open them up to devastating liability lawsuits. After protracted negotiations, the industry and the U.S. government reached an agreement in 1970. According the agreement, the companies would carry the warning label and would cease advertising on television in exchange for immunity from lawsuits based on federal law.

Roy Gardner, “Games for Business and Economics”, John Wiley & Sons, 1995

What happened then? One would think that, without TV ads and with those horrible warning labels, people would immediately stop smoking and tobacco companies would become bankrupt. Because everybody knows that people always act rationally on their own behalf, and that advertising is absolutely key for a company to be recognised and maximise sales. However (don’t laugh at the figures, it was 1970!):

The big four companies (American Brands, Reynolds, Philip Morris and Liggett & Myers) spent $315 million advertising their products in 1970, but only $252 million in 1971. This $63 million decrease came right out of the television advertising accounts. At the same time, it came as something of a surprise to the industry, and a welcome one at that, that profits rose by $91 million.

Op. cit.

The conclusion is “the advertising game” is a LOSE LOSE game for everyone but… the Mad Men living on advertising.

Let me propose a thought experiment: Imagine that, just for the sake of the argument, an obtuse and arrogant regulator decided to ban ALL advertising in the world. Yes, I repeat: ALL advertisement. Would you stop buying and consuming what you buy and consume? I would bet you would NOT.

Conclusion: Companies providing the end user products you and I consume would earn a lot more —because they would save advertisement expenditures—, they could and would —in a competitive market— offer their product cheaper and even rise salaries.

What would be the problem? Google, Facebook and all these fancy companies whose business model is selling advertisement would become bankrupt… unless, we paid them just and exclusively for the “valuable” end user services they provide us —search, posting cat photos, whatever— which, by the way, looking to their P&L statements, would be a lot cheaper to provide.

You may call this an old interventionist economic model, but remember this is only a thought experiment.

Smoking I wait (for your answers)

One comment

  1. It would be very interesting to have more information on this. I cannot believe nobody has thought of that before.

    One possibility is (as you suggest in the name of the entry) that advertising is good for choosing a particular brand but not for the product itself. This forces a competition on advertising that substitutes a more “genuine” comparison.

    Unfortunately, I fear that without advertising, comparison would be based on rumors and fake news, even more unfair than advertising.

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