July 05, 2006
Frank Pasquale on A Coasean Analysis of Marketing
Posted by Christine Hurt

I was first introduced to Goldman's work at the Yale Search Engine conference, where at just about every panel there was some positive mention of his article Deregulating Relevancy.  I learned a lot from that piece about both search engines and trademark law; anyone working in that policy space should grapple with his ideas on their intersection.

I can say the same about the current piece, A Coasean Analysis of Marketing: it combines a powerful normative framework, meticulous empirical detail, and a genius for clarification in such a way that anyone thinking about how to regulate marketing on the internet (and perhaps beyond!) is going to have to respond to the ideas set forth here.

Perhaps Goldman's greatest contribution here is his keen recognition of the unintended consequences of the regulation of marketing.  As he shows, regulation of one media may just drive marketing to others (ala the "squeeze the balloon" theory of the anti-campaign-finance-regulation crowd).  Even more disturbingly, the anti-spyware laws of pioneer states like Utah may stymie the very innovation Goldman deems essential to efficient targeting of marketing (a "Coasean filter" capable of best matching consumers to desired marketing messages).  Rational policymaking should at the very least manage to avoid self-defeating measures.

Yet Goldman also proposes a more robust concept of rationality in marketing policy in the article, and it's here that I start to take issue with his work.  According to Goldman, marketing policy should be driven by an effort to maximize consumer's utility from marketing messages.  That utility can, in turn, be predicted from (or amounts to) their positive response to the commercial propositions delivered by marketing.  The positive and normative closely commingle here: the ideal regulatory regime is one that most closely matches up consumers' pre-existing tastes and preferences to the marketing messages most likely to satisfy them.

Were consumer preferences entirely exogenous to marketing system, perhaps we could accept such a model unproblematically.  But tastes are often endogenous to (i.e., created or influenced by) marketing.  People hear many messages in daily life: from parents, churches, teachers, government, Posnerian "norm entrepreneurs," etc. Rather than celebrate a world where a powerful technological edifice fine-tunes marketing messages to have maximum effect on consumer behavior, I worry about this as one more (and perhaps the ultimate) way in which marketers will drown out other messages.  Goldman praises innovations that permit marketers to predict what consumers will want or do (e.g., on p. 36-37); I fear these "predictions" may amount to self-fulfilling prophecies vindicated by the influence the new devices are having on their owners. 

I will admit at the outset that all the immanent critiques I may offer below are driven by this one transcendent concern about the morally corrosive effects of an overly commercial culture (pace Albert O. Hirschman's resurrection of the doux commerce school!).  Perhaps it is impossible for Goldman both to write a rigorous economic account of marketing policy and to respond to critics like me who refuse to take consumer preferences as given.  But I feel obliged to develop these ideas, if only to provide some normative cover for groups like Public Citizen or Adbusters or Campaign for a Commercial-Free Childhood (who will undoubtedly keep pressing for the sort of medium-specific regulation that Goldman critiques).  As I've noted in the debate over net neutrality, we should recognize the degree to which our cultural environment involves a battle for mind-share.  Marketers' increasing capabilities for winning that battle can't be uncritically advanced.

1) Aggregation of Utilities from Marketing

One fundamental precept of Goldman's paper is that consumers are likely to receive more utility from marketing than academics usually recognize.  Formula 1 (p. 10) sets forth a mathematical model for estimating this utility: the net private utility (NPU) of marketing equals the sum of substantive utility (SU), reaction utility (RU), and attention consumption utility (ACU).  He does a great job giving examples of each, but I don't know if there's any principled way to aggregate them in the way the formula suggests can be done.

Such a formula works as a challenge to critics of marketing; it shows that they probably aren?t taking into account the full panoply of effects arising out of marketing.  But the implicit comparisons of costs and benefits also raise a difficulty for the paper.   Is there a way of monetizing the component parts of NPU -- including SU, RU, and ACU?  It would seem that one would need to do so in order to get a rough sense of the real costs and benefits of marketing.  I think there's some good literature on valuation from Chris Serkin, and treatises on the valuation of intangibles.  On the other hand, most of that is about property, while I think one of the points of Goldman's work is that we should hesitate to propertize attention. 

On the other hand, even assuming one did do this type of valuation, I think the data are a bit ambivalent.  If, say, a doctor making $200K per year sees an ad for a $200 pair of sneakers pop up on his computer, and decides to buy them, and thinks them well worth the money, and would not have bought them otherwise, what's the value of the marketing message that alerted him to that opportunity?  What about a guy making 25K a year who has the same feeling but really ought to be shopping at Payless?  What if the person buys them just to impress their friends? What if they end up disliking them and not being able to return them?

Admittedly, these may all be picayune points individually, but I think they add up to something larger when taken as a whole.  An article like Goldman's essentially suggests to marketers, policymakers, economists, psychologists, and accountants that they need to do a better job measuring things like NPU.  But is that type of research on the horizon?  Is there any way to measure the relative strength of each "vector"?  Moreover, even if one could, is there any entry point in the theory for an objective, rather than a subjective, account of well-being?   

For example, there might be a consumption fanatic who treasures every catalog he receives in the mail (ala Amartya Sen's example of the "pleasure wizard"), and an angry ascetic activist who is deeply pained by each.  It's odd that the first might even pay for the catalogs, while the latter might pay not to receive them.  Does a calculation of NPU average out these reactions?  If so, again, I'm led back to the normative point?isn?t there some reason to privilege the angry ascetic activist's reaction?  Perhaps not in Japan, where savings are arguably too high, but at least in America, where family net worth is, on average, $63,000 (I believe), and the median 401k for a 40-yr-old is around $30K, and the savings rate is negligible?

Of course, if 401k's and savings accounts are being marketed, perhaps my concerns here are misplaced.  But as Thaler and others suggest, to increase savings, one really has to make that the default option.  In other words, marketing seems much more capable of spurring instant gratification than promoting responsible consumption and saving patterns. 

2) Tools of our tools

As the paper demonstrates, the more information marketers have about us, the less unwanted material we will receive.  But is there a larger, more corrosive effect from marketing?  What if I gradually start spending more due to ultra-targeted marketing?  Imagine some ingenious marketing algorithm taps into my inner hedonist, gradually cultivating my inchoate preferences for the "good life" into a florid spending spree for a Bose stereo system, an Italian leather couch, and a Jaguar.  I don't think a "revealed preference" approach really works here.  Marketing eventually starts not merely to show people ways of satisfying preferences, but also influences the preferences themselves.  See, e.g.., Hanson & Chen, or Hanson & Yosifon, on these points. 

Jaron Lanier has suggested that we are getting more shaped by our machines than shaping them.  And the point goes back in the philosophy of technology from Langdon Winner to Henry Thoreau. As Pope John Paul II said in the encyclical Centesimus Annus, business may create "new and higher forms of satisfying human needs," but also may generate "artificial new needs which hinder the formation of a mature personality" (n. 36).

If Goldman wants to acknowledge these darker visions of marketing, his discussion of neuromarketing might be an interesting point of entry. They don't necessarily derail the argument of the paper.  They only demand acknowledgment that there might be policy choices that are thinly rational for us as individuals, but that might eventually change our society in ways that may be unintended (sensible micromotives that lead to senseless macrobehavior). 

Imagine the evolution of peacocks here.  It makes sense for each male to have a longer and more extravagant display of tail feathers, in order to maximize reproductive success for its own genes.  But peacocks overall are evolving towards utterly unmanageable surplusage of plumage.  (This example is based on an example given by economist Robert Frank at a recent conference on evolutionary biology and human behavior.)  Is there a chance that a society of maximal marketing effectiveness edges toward being what Edgerton calls a "sick society"?  Is this perhaps why the hyper-marketed USA, despite a per capita income near $25K p.a., has a near-negative savings rate, while the Chinese manage to save a much higher percentage of a much lower income?  I concede that these policy concerns may be beyond the scope of a paper on maximizing marketers' efficiency, but they do tend to undermine its normative force.

3) "Kinds of societies" vs. "minimizing harms/maximizing benefits to individuals"

Goldman makes some very good points against the "privacy crowd" in the course of defending surreptitious monitoring.  I will be the first to admit that the Coasean filter ideally minimizes costs and maximizes benefits of marketing to individuals.  My concern is that, in the course of enabling these vast troves of data, we end up being utterly "known" by the highest bidder, or the state. 

For example, one might credibly argue that complete government control of P2P networks, combined with an ASCAP style compulsory license calibrated to "ability to pay," would enable the best solution to the current controversy over music "piracy"/cartel monopolization of content.  But as Wendy Gordon has pointed out, what about that medium's capacity to distribute samizdat?  Would we want to curtail that just in order to assure the type of perfect price discrimination that economic theory assures us is the most efficient response to monopolization?  Even if complete gov't/corporate control led to a Pareto-optimal solution now (ala Paul Goldstein's celestial jukebox), aren't there larger costs?

Of course, Goldman can fairly respond that this concern is at its core ideological, and that we should only be concerned about to the extent we think the movie V is for Vendetta (or, perhaps, the unitary executive) is plausible.  It might even be fun to watch content owners both a) assure consumers that the data collected by such Coasean filters is utterly, impregnably protected from illicit hacks and b) argue that archiving projects like Google Library must be stopped because the database will eventually be broken into. 

4) Conclusion

Well, there is plenty more to comment on -- my copy of the paper is studded with post-its on fascinating footnotes and points to follow up on (the cell phone oracle in n. 234 is particularly intriguing!).  But I've likely gone on too long already. 

In conclusion: despite my own deep suspicion of marketing, Goldman's work has convinced me a) of its many unrecognized utilities and b) that many current regulatory proposals may not only fail to address the problems caused by marketing, but may also contribute to them.  Goldman's technological solution to the problem of matching consumers to marketing they want is a sobering reminder of the limits of law.  But a broader (albeit inevitably ideological) perspective on our current predicament highlights the limits of this technology.

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