Internet Advertising

Outline

1 Introduction

2 Main Part
2.1 The commercialization of the Internet
2.2 Pros and Cons of Internet Advertising
2.3 Search goods and experience goods – which kind of advertising applies to each?
2.3.1 Search goods and experience goods
2.3.2 Informational versus persuasive advertising – which applies to search and experience goods
2.3.3 When is informational advertising successful?
2.4 Advertising and social welfare
2.4.1 Advantages and disadvantages of advertising for the social welfare
2.4.2 Is there a socially optimal amount of Advertising?

3 From an interdisciplinary perspective

Bibliography
Books & Articles
Internet Sources

1 Introduction

According to a recent study from the Nielsen Media Research, only 2.9 per cent of the whole advertising budget in Germany was spent in Internet Marketing in 2006. A number that is -compared to TV (34.7 per cent) and print media (39.8 per cent) - still relatively small.^[1] Yet the market for Internet Advertising marginally records a significant growth within the last years. In 2001 the online spendings totalled up to 211 million Euros. Five years later this number already increased threefold to 692 million Euros. Considering the rapid spread and growing importance of the Internet it is foreseeable that also the market for Internet Advertising will further expand – posing therefore new challenges not only to advertisers. From the economic perspective the question appears if classical approaches and assumptions also apply for the market of Internet Advertising.

The following paper surveys Internet Advertising in general. It observes the historical development of Internet Advertising, compares search goods and experience goods, distinguishes in this respect informational from persuasive advertising and finally defines factors that influence the welfare of society.

2 Main Part

2.1 The commercialization of the Internet

In 1996 Yahoo.com and Amazon.com established an advertising relationship providing Internet Users with ads on books and suchlike that popped up according to the particular search entry. Soon other companies followed into this new marketplace and realized the advertising potential of this new medium. Figure 1 clearly demonstrates the rapid growth of Internet Advertisement. According to the Interactive Advertising Bureau (IAB) and Pricewater-houseCoopers LLP the Internet reached a new record of $4.9 billion for the first quarter of 2007. This represents a 26 percent increase over the first quarter 2006 at $3.8 billion. Regarding this, IAB President and CEO Randall Rothenberg states that "the continued growth of online ad revenues clearly illustrates marketers' increased comfort with the extraordinary vitality and accountability of this medium."^[2]

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The survey, conducted by the New Media Group of PricewaterhouseCoopers, represents data from all companies that report online advertising revenues. Those results are considered to be the most accurate measurement of interactive advertising revenues as the data is compiled directly from companies that sell advertising on the Internet. It includes data on online advertising revenues from Web sites, commercial online services, free e-mail providers and all other companies selling online advertising.^[3]

But what explains the rapid growth of Internet advertising within the last decade? To answer this question, VanHoose firstly describes alternative ways in which firms market their products.^[4]

According to VanHoose there are to traditional approaches of advertising a particular product: Direct marketing and mass marketing.

Direct Marketing describes advertising that is “targeted at specific consumers, typically in the form of postal mailings, telephone calls, or e-mail messages.”^[5] Direct marketing is therefore a personalized way of advertising that tries to address a particular consumer directly whereas mass marketing aims to reach as many consumers as possible – “typically through television, newspaper, radio, or magazine ads.”^[6]

Vanhoose however identifies a third method: interactive marketing. Interactive marketing is a method “that permits a consumer to follow up directly by searching for more information and placing direct product orders”^[7] The consumer is now able to respond directly to an advertising message – mostly by searching for more information on the product or by buying the particular product (‘add to basket’).

According to VanHoose, most Internet advertising is a form of interactive marketing. To prove this he refers to the most common type of online advertising – banner ads. A banner advertisement is a graphic display that appears on a web page and that is linked to the producer’s home page. By clicking on the banner, the consumer becomes ‘active’ and thus involved into an interaction.

Although VanHoose is right to claim that most Internet advertisement is a form of interactive marketing, it occurs to me that this does not automatically mean that it is not also a form of direct or mass marketing. The mentioned banners, for instance, often function by using cookies and appear thus according to potential consumers’ interests. Would that – per definition - not also be a form of direct marketing as it targets at specific consumers? I think the main strength of Internet advertisement is indeed that it allows combining easily the classical marketing approaches and even adding an interactive element. In addition, further advantages – but also disadvantages - of Internet advertising are shortly demonstrated in the following.

[...]

^[1] http://www.tomorrow-focus.de/Dokumente/Studien/Deutsch/OnlineAdvertisingSpendingReport_1HJ_2007.pdf, June 4th

^[2] http://www.iab.net/about_the_iab/recent_press_releases/press_release_archive/press_release/5170 - 29.05.

^[3] http://www.iab.net/about_the_iab/recent_press_releases/press_release_archive/press_release/5170%20-%2029.05. – 30.05.08

^[4] VanHoose, 2003, p.172

^[5] VanHoose, 2003, p.172

^[6] VanHoose, 2003, p.172

^[7] VanHoose, 2003, p.174