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CHAPTER 6
The Regulatory and Ethical Environment
of Promotions
PPT 6-1
KEY TERMS
ethics
deception
puffery
primary demand
unfair advertising
vertical cooperative
advertising
comparison
advertisements
monopoly power
advertising
substantiation
program
consent order
cease-and-desist order
affirmative disclosure
corrective advertising
celebrity endorsements
self-regulation
consumerism
cookies
spam
premiums
appropriation
defamation
slander
libel
SUMMARY
PPT 6-2
LO1 Discuss the impact of promotion on society’s well-being.
On the positive side, promotional efforts are said to benefit society by lowering costs to
increase the standard of living, fostering innovation, providing revenues to mass media,
delivering a constant flow of information valued by consumers, and informing about
LO2 Summarize ethical considerations related to brand promotion campaigns.
Ethical considerations that frequently arise involve truthfulness, concern for the impact of
promotional messages on children, and the promotion of controversial products such as
Chapter 6: The Regulatory and Ethical Environment of Promotions ❖ 2t
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
LO3 Describe aspects of advertising regulated by the U.S. government.
In the United States, advertisers may not engage in deceptive or unfair practices,
including bogus cooperative advertising allowances, unfair comparison advertising, and
LO4 Summarize the regulatory role of the Federal Trade Commission.
In the United States, the Federal Trade Commission (FTC) was established in 1914 and
has been especially active in trying to deter deception and unfairness in advertising. The
LO5 Explain the meaning and importance of self-regulation by marketers.
Some of the most important controls on advertising involve voluntary self-regulation by
marketing professionals. For example, the American Association of Advertising
Agencies has issued guidelines for promoting fairness and accuracy when using
LO6 Discuss the regulation of direct marketing, sales promotion, and public
relations.
In direct marketing and e-commerce, the primary concern has to do with consumer
privacy. Laws and regulations, including the Do Not Call Registry and the CAN SPAM
Act, restrict the ways in which companies can contact consumers with a sales offer. Other
restrictions are aimed at ensuring that contests and sweepstakes do not amount to
CHAPTER OUTLINE
INTRODUCTORY SCENARIO: I Didn’t Sign Up for This!
Students will undoubtedly relate to this example of the woman who signs up for a
sweepstakes and then suddenly starts getting all sorts of phone calls and emails from
Chapter 6: The Regulatory and Ethical Environment of Promotions ❖ 3t
various marketers. (A good way to get class going is to ask students how many have had
this experience.)
This scenario highlights an important issue, so be sure to drive this point home
immediately: There is nothing unethical or illegal about what happened to Anne
Marie in this scenario. It may be annoying and maddening, but the firms did not do
anything wrong, per se. Did they do what was in the best interest of most customers?
Probably not. Issues to raise here:
• Firms do accumulate names and addresses from various sources, and this is
called database marketing. It is used primarily for direct-mail efforts, but can be
used for email campaigns as well. Again, it is not illegal.
• Some firms, however, have recognized the sensitivity of consumer privacy
issues and do not collect or use individual-consumer data—except when
consumers are customers and expressed a preference for information (e.g., a
catalog or email updates from the firm).
• The biggest problems in privacy occur with the Internet: 80 percent of
respondents to a survey felt that pop-ups and spam were “very annoying,” while
only 10 to 15 percent of the same group were “very annoyed” with TV or print
ads.
• Firms are turning more to “permission based” or “opt-in” direct marketing and
email promotions as a way to demonstrate sensitivity to consumer privacy
issues.
• Marketers defend their use of database marketing as good marketing research
that makes them more efficient at serving consumers’ needs: more efficiency
means lower costs, which mean lower prices. This is a great issue for class
discussion.
• Legislation has affected the privacy issue. The “do-not-call-list” was
implemented in 2004 with 60 million phone numbers registered for the list by
American consumers to restrict telemarketing calls.
Important teaching note: A lot of the issues raised in this chapter will generate an
emotional reaction, but it is imperative to move students away from the emotional,
intuitive reactions to more analytical, fact-based assessments. Many of the criticisms of
brand promotion are legitimate and require careful consideration. A large number of the
criticisms of brand promotion are naive and simply emotional and do not stand up under
analytical, objective scrutiny. Challenge your students to be analytical and objective.
I. Social Impact of Brand Promotion
PPT 6-3, 6-4
This discussion of the social impact of brand promotion is organized issue by issue. We
have chosen to raise an issue and then take a pros-and-cons approach to offer students a
balanced treatment. If a person finds brand promotion intrusive and manipulative, the
social impact usually provides fuel for the fires of skepticism. One thing is sure: The
social impact of advertising invites vigorous debate about what is positive and negative in
Chapter 6: The Regulatory and Ethical Environment of Promotions ❖ 4t
the brand promotion process.
A. Education or Intrusion?
1. Promotion Informs. By regularly assessing information and brand promotion
claims, consumers become more educated about the features, benefits,
functions, and values of products. Educated consumers enhance their lifestyles
2. Promotion Is Superficial and Intrusive. Critics argue that brand promotion
does not provide good product information. The information it does provide is
shallow and meaningless. Critics claim that brand messages should contain
functional feature information and performance results. Marketers argue in
making.
B. Lower Costs or Wasted Resources?
1. Lower Product Costs
• Due to the economies of scale produced by brand promotion, consumers
may pay less.
• Greater variety of choice in products and services stems from the
increased probability of success firms realize from being able to introduce
new products with the assistance of brand promotion.
• The pressures of competition and the desire to have products that are easy
to promote stimulate firms to produce improved products.
• The speed and reach of brand promotion aids in the diffusion of
innovations. Therefore, new discoveries can be communicated to a large
percentage of the marketplace very quickly.
2. Wasted Resources and Uneven Benefits. The opposing view is that brand
promotion represents an inefficient, wasteful process that “shuffles existing
total demand,” rather than expanding total demand. Brand promotion thus
brings about economic stagnation and a lower standard of living. Similarly,
brand differences are trivial, and the proliferation of brands does not offer a
greater variety of choice, but rather a meaningless waste of resources. In
addition, some argue that brand promotion is a tool of capitalism that widens
the gap between the rich and the poor.
C. Greater Well-Being or More Dissatisfaction?
1. Need Creation. The argument is that consumers are relatively easy to seduce
into wanting the next shiny bauble offered by marketers, who encourage
consumers to try to look and act like models in advertisements.
Chapter 6: The Regulatory and Ethical Environment of Promotions ❖ 6t
appropriate point to provide some clarification: There is no such thing.
Research by psychologists and marketers alike verifies that the human brain is
capable of processing information below the conscious threshold of
6. Bringing Art to the Masses. Some would argue that one of the best aspects
of advertising is its artistic nature. The pop art movement of the late 1950s
E. Enabling or Controlling Mass Media?
1. Support for Mass Media
• Fans of brand promotion argue that advertising is the best thing that ever
happened to an informed democracy. Magazines, newspapers, and
television and radio stations are supported by advertising expenditures. In
2. Influence over Programming
• Critics argue that marketers who place ads in media have an unhealthy
effect on shaping the content of information contained in the media.
Examples in the chapter point out the payment to journalists for favorable
editorial comments about brands.
• A related issue is the extent to which brands are being placed and featured
in programming from American Idol to Friends. Since when would the
plot of a program benefit from commercialization?
• Another charge leveled at marketers is that they purchase airtime only on
programs that draw large audiences. Critics argue that these mass-market
programs lower the quality of television (e.g., South Park) because
cultural and educational programs, which draw smaller and more selective
markets, are dropped in favor of mass-market programs.
• Finally, programming for important controversial issues like poverty and
AIDS have a hard time attracting advertisers.
II. Ethical Issues in Promotion
PPT 6-5
Ethics are moral standards and principles against which behavior is judged. Honesty,
Chapter 6: The Regulatory and Ethical Environment of Promotions ❖ 7t
integrity, fairness, and sensitivity are all included in a broad definition of ethical
behavior. Much of what is judged as ethical or unethical comes down to personal
judgment.
Ethics comes into play mainly in three areas of brand promotion:
A. Telling the Truth
Deception is making false or misleading statements in an advertisement. The
difficulty regarding this issue is in determining just what is deceptive. A
manufacturer who claims a laundry product can remove grass stains is subject to
Likewise, it is impossible to legislate against emotional appeals such as those
made about the beauty- or prestige-enhancing qualities of a product, because these
claims are unquantifiable. Because these appeals are legal, the ethics of such
B. Targeting Children
The desire to restrict brand promotion aimed at children is based on three
concerns.
• It is believed that advertising promotes superficiality and values founded in
• Children are considered inexperienced consumers and easy prey for the
• Advertising influences children’s demands for everything from toys to snack
foods. These demands create an environment of child-parent conflict.
Many critics argue that programs and films featuring commercial products (e.g.,
C. Controversial Products
Ethical questions arise about the wisdom of allowing the promotion of
controversial goods and services, such as alcoholic beverages, tobacco, gambling
and lotteries, and firearms.
1. Tobacco and Alcohol. Critics have called into question the targeting of ethnic
and minority groups for promotion of products such as malt liquor. Similarly,
the tobacco and alcohol industries have been the target of boycotts over their
sponsorship of professional sporting events patronized heavily by underage
2. Be sure to have a clear and complete discussion of the issue of primary
Chapter 6: The Regulatory and Ethical Environment of Promotions ❖ 8t
demand here. All of the controversial product categories are mature products,
and brand promotion does not affect aggregate demand in mature product
3. Gambling and Lotteries. Gambling and state-run lotteries are another
controversial product with respect to promotion. What is the state’s obligation
4. Final key point: Advertising is not powerful enough to create primary demand
III. Regulation of Advertising
PPT 6-6, 6-7
Three primary groups—consumers, industry organizations, and government bodies—
regulate advertising in the truest sense. They shape and restrict the advertising process.
A. Deception and Unfairness. The Federal Trade Commission (FTC) has a policy
statement on deception. It specifies the following three elements as essential in
1. There must be representation, omission, or practice that is likely to mislead
the consumer.
2. This representation, omission, or practice must be judged from the perspective
of a consumer acting reasonably in the circumstance.
3. The representation, omission, or practice must be a “material” one. The basic
question is whether the act or the practice is likely to affect the consumer’s
This advice is very legal, but practical guidelines can be found on the FTC’s
website.
The definition of unfairness had been relatively vague. In 1994, Congress ended a
long-running dispute in the courts and in the advertising industry by approving
B. Competitive Issues. Several advertising practices related to competition can
result in regulation: cooperative advertising, comparison advertising, and use of
monopoly power.
• Vertical cooperative advertising is an advertising technique in which a
manufacturer and dealer (either a wholesaler or retailer) share the expense of
Chapter 6: The Regulatory and Ethical Environment of Promotions ❖ 9t
bogus cooperative advertising allowances. These allowances require no effort
or expenditure on the part of the dealer and thus represent hidden price
• Comparison advertisements are those in which an advertiser makes a
comparison between the firm’s brand and competitors’ brands. Again,
• Some firms are so powerful in their use of advertising that monopoly power
can become a problem. This issue normally arises in the context of mergers
C. Advertising to Children. This was raised earlier as a social issue, but here critics
argue that continuously bombarding children with persuasive stimuli can alter
their motivation and behavior. Although government organizations like the FTC
D. Who Regulates Advertising?
IV. Federal Government Regulation.
PPT 6-8, 6-9, 6-10
In the United States, several different government agencies have been given the
power and responsibility to regulate the advertising process. Six agencies have legal
powers over advertising. The FTC is the most powerful of these regulatory bodies and
warrants special attention.
A. FTC’s Legislative Mandates
1. The original purpose of the agency was to prohibit unfair methods of
2. In 1938, the effects of deceptive advertising on consumers became an
issue. The Wheeler-Lea Amendment (1938) was concerned only with the
effect of advertising on competition. The amendment broadened the FTC’s
powers to include regulation of advertising that was misleading to the
public (regardless of the effect on competition).
3. Several other acts provide the FTC with legal powers over advertising.
The Robinson-Patman Act (1936) prohibits firms from providing phantom
cooperative-advertising allowances as a way to court important dealers.
Chapter 6: The Regulatory and Ethical Environment of Promotions ❖ 10t
Regulatory power over labeling and advertising disclosure was provided
to the commission by the Wool Products Labeling Act (1939), the Fur
Products Labeling Act (1951), and the Textile Fiber Products Act (1958).
Consumer protection legislation, which seeks to increase the ability of
consumers to make more informed product comparisons, includes the Fair
4. Recent legislation relates to the FTC’s role in monitoring and regulating
advertising. The Nutrition Labeling and Education Act (1990) requires
uniformity in the nutritional labeling of food products and sets strict rules
for health claims. The Children’s Television Act (1990) limits the minutes
of advertising during television programs for children.
B. FTC’s Regulatory Programs and Remedies
1. The advertising substantiation program of the FTC was initiated in
2. An advertisement that fails to disclose important material facts about a
product can be deemed deceptive, and the FTC may require affirmative
disclosure in future advertising, whereby the important material absent
from prior ads must be included in subsequent advertisements.
3. In a consent order, an advertiser accused of running deceptive or unfair
advertising agrees to stop running the advertisements in question, without
admitting guilt.
• A cease-and-desist order requires that advertising in question be
stopped within 30 days so a hearing can be held to determine
4. The most severe remedy for advertising determined to be misleading is
corrective advertising. In cases where evidence suggests that consumers
have developed false beliefs about a brand based on misleading or
deceptive advertising, the firm may be required to run corrective ads to
dispel those false beliefs.
5. The FTC has specific rules for advertisements that use celebrity
endorsements. In the case of experts (those whose experience or training
allows a superior judgment of products), the endorser’s actual
Chapter 6: The Regulatory and Ethical Environment of Promotions ❖ 11t
C. State Regulation
2. Offices of the states’ attorneys general offices do have some powers.
V. Industry Self-Regulation
PPT 6-11, 6-12
Several industry and trade associations and public-service organizations have voluntarily
established guidelines for advertising within their industries. The reasoning is that self-
regulation is good for the advertising community as a whole and promotes the credibility,
and therefore the effectiveness, of advertising itself. The text lists various business
organizations that have taken on the task of regulating and monitoring advertising:
A. National Advertising Review Board. The NARB is the operations arm of the
National Advertising Division (NAD) of the Council of Better Business
Bureaus. Complaints received from consumers, competitors, or local branches
of the Better Business Bureau are forwarded to the NAD. After a full review
B. State and Local Better Business Bureaus. There are more than 140 separate
local bureaus. Membership dues paid by area businesses support each local
organization. The three divisions of a local BBB—merchandise, financial, and
solicitations—investigate advertising and selling practices of firms in their
areas. A local BBB has the power to forward a complaint to the NAD for
evaluation.
C. Advertising Agencies and Associations. An individual agency is legally
responsible for the advertising it produces and is subject to sanctions for
deceptive or misleading claims. The American Association of Advertising
Agencies (4As) has no legal or binding power over its agency members, but it
can apply pressure when its board feels industry standards are not being
D. Media Organizations. Individual media organizations evaluate the advertising
they receive for broadcast and publication. The National Association of
Broadcasters (NAB) has a policing arm known as the Code Authority, which
implements and interprets the separate radio and television codes. Newspapers
have historically been rigorous in their screening of advertising. Many
newspapers have internal departments to screen and censor ads believed to be
