July 05, 2006
Peter Huang on Coasean Analysis of Marketing
Posted by Christine Hurt

Eric Goldman’s article: A Coasian Analysis of Marketing, criticizes medium-specific regulation of marketing, arguing instead for a cross-media holistic approach to marketing regulation. He argues that several categories of legal regulation, including opt-ins, opt-outs, and mandatory disclosures of metadata, are unsatisfactory. He also concludes that several categories of market alternatives to regulation, including attention marketplaces, infomediaries, and bonded sender programs, are unsatisfactory. What is his proposal for a global solution to unwanted marketing? He envisions a rapidly developing technological alternative, that he terms Coasian filters, which automatically will filter out marketing that is unwanted according to consumer preferences that Coasian filters infer based upon monitoring a vast dataset of consumer behavior and communication. He warns that well-intentioned regulation of surreptitious monitoring devices, such as adware and spyware, could unintentionally hamper development of Coasian filters. Thus, he worries that such current regulatory overreactions to new technology might prevent social welfare from increasing due to such technological progress as Coasian filters.

I found his vision of the future to be intriguing, but one that many people may prefer to not live in. Eric is clearly knowledgeable about marketing regulation and has thought carefully about it. That being said, the rest of this commentary will raise some more specific critical thoughts:

First, his claim that a cross-media approach to regulating marketing is neither sustainable nor optimal is based upon two other claims, namely (1) communication media will inevitably converge, and (2) all media have cross-elasticities of demand with each other. The convergence claim is an empirical one that might be overblown in terms of its policy implication that statutory delineations between media will become unworkable. Even if there is media convergence, it will not happen overnight as cable tv providers, internet access providers, manufacturers of computers and televisions, and phone companies bemoan. The point about cross-elasticities of demand is true, but does not answer this crucial empirical question, namely what is the size of those cross-elasticities (are they even non-zero?)?

Second, he worries a lot about social welfare consequences to foreclosing some marketing exposures or reallocating marketing efforts, but he can only say that social welfare consequences are uncertain (e.g., on page 7 at the text associated with footnotes 33 and 36). Similarly, he states on page 14, that "marketing can produce positive externalities for consumers who are not exposed to the marketing themselves," based on 2 well-known economic studies that he cites in footnote 68. But as he notes in that footnote, those studies refer to advertising that is about prices. A lot of unwanted marketing is not about prices.

Third, on page 5, he describes Part II of his paper as building "an economic model for consumer utility from marketing." But part II does not build an economic model in the sense of that phrase as economists utilize that phrase. Part II simply provides on page 10, a formula decomposing a consumer’s NPU (Net Private Utility) to a marketing exposure into 3 components.

Fourth, some of the sources that he cites as working papers have since been published. For example, on page 16, footnote 88 should be: Daniel R. Shinman, An Economic Approach to the Regulation of Direct Marketing, 58 Fed. Comm. L.J. 323 (2006), available at http://www.law.indiana.edu/fclj/ and on page 34, footnote 225 be: Theodore Loder et al., An Economic Response to Unsolicited Communication, 6 Advances in Econ. Analysis & Pol’y Art. 2 (2006), available at http://www.bepress.com/bejeap/advances/vol6/iss1/art2/.

Fifth, on page 16 he mentions the problem of some consumer preferences being latent and on page 39 at the text associated with footnote 256, he makes that claim that "Coasian filters help discover and act upon later preferences." People might have no preferences for Coasian filters to infer or people to self-report because of such psychological tendencies as the focusing illusion. See Daniel Kahneman et al., Would You Be Happier If You Were Richer? A Focusing Illusion, 312 Sci. 1908 (2006).

Sixth, such latent preferences might be unreflected upon and raises two broader questions, namely (1) preferences over what: product attributes, commodities, or marketing and (2) should mere satisfaction of preferences be society’s primary goal? On pages 45-47, he discusses related concerns about deliberative democracy, but stays with a preference-satisfaction worldview.

Seventh, on pages 43-45, he realizes consumers’ likely concerns about privacy of information harvested by and negative reactions towards Coasian filters. But, his discussion of a "consumer-Coasian filter privilege" does not acknowledge how emotional and strong consumer fear and mistrust can be. Patients often are less than forthcoming with their physicians despite doctor-patient privilege.

Eighth, on page 10, while his analysis of marketing regulation differentiates between a consumer’s utility from the substantive content of messages (SU) versus utility from a consumer’s reaction to marketing exposure regardless of substance (RU); he does not consider how to regulate the affective or emotional content of marketing. See, e.g., James N. Druckman, Stoking the Voters’ Passions, 312 Sci. 1878 (2006) reviewing Ted Brader, Campaigning for Hearts and Minds: How Emotional Appeals in Political Ads Work (2006).

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