Electronic copy available at: http://ssrn.

com/abstract=2142692

CHI CAGO
INSTITUTE FOR LAW AND ECONOMICS WORKING PAPER NO. 619
(2D SERIES)


The Role of Keyword Adversiting in Competition
among Rival Brands

David S. Evans and Elisa V. Mariscal



THE LAW SCHOOL
THE UNIVERSITY OF CHICAGO

November 2012

This paper can be downloaded without charge at:
The University of Chicago, Institute for Law and Economics Working Paper Series Index:
http://www.law.uchicago.edu/Lawecon/index.html
and at the Social Science Research Network Electronic Paper Collection.
Electronic copy available at: http://ssrn.com/abstract=2142692 Electronic copy available at: http://ssrn.com/abstract=2142692

1 14

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Evans: uevansmaiketplatfoims.com
Naiiscal: emaiiscalmaiketplatfoims.com



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This papei consiueis iecent pioposals foi iestiicting keywoiu auveitising using
competitoi bianu names. Keywoiu auveitising is similai to many othei wiuely useu anu
valuable methous of maiketing to the customeis of iivals that inciease competition anu
facilitate entiy. Queiies foi piouucts oi seivices using seaich engines help infoim
consumeis about othei competitive alteinatives anu may enable them to compaie uiffeient
piouuct offeiings. Economists have founu oveiwhelmingly that this type of infoimative anu
compaiative auveitising benefits consumeis anu, conveisely, that iestiicting such
auveitising haims consumeis. Complainants in some iecent keywoiu auveitising cases
have sought to foibiu seaich engines fiom using tiauemaikeu names as keywoius, claiming
that this may cause confusion. We aigue that most consumeis aie likely to benefit fiom
keywoiu auveitising anu aie unlikely to be confuseu by the piactice. Noieovei, without a
caieful weighing of the likely costs anu benefits of this type of iegulation, consumeis might
beai significant costs by eliminating an easy iefeience with which to compaie existing oi
new piouucts, iesulting in impoitant ieuuctions in consumei benefits. In fact, even moie
naiiow iemeuies such as case-specific penalties foi causing consumei confusion coulu
uiscouiage seaich engines fiom offeiing this seivice to auveitiseis, uecieasing theii value
to consumeis as a seaich tool anu iesulting in significant haim.

!
Evans is Lectuiei, 0niveisity of Chicago Law School anu visiting Piofessoi, 0niveisity College
Lonuon. Naiiscal is visiting Piofessoi, Centio ue Investigacion y Bocencia Economicas (CIBE) anu
Instituto Tecnologico Autonomo ue Nxico (ITAN). Both aie Nanaging Biiectois at Naiket Platfoim
Bynamics. They woulu like to thank Nicholas uiancailo anu }effiey }ensen foi ieseaich help anu
uoogle foi financial suppoit.

Electronic copy available at: http://ssrn.com/abstract=2142692

2 14


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A consumei types the name of a bianu into a seaich engine. In most cases,
the seaich-iesults page shows two sets of iesults: "oiganic seaich iesults" anu
"sponsoieu links" oi "aus." The iesults in the miuule of the page aie the "oiganic
seaich iesults" anu they contain a set of links ielateu to the bianu itself as well as
links to similai piouucts that might be ielevant to the consumei's queiy. The seaich
iesult page might also show "sponsoieu links," which aie auveitisements that
appeai on the top anu to the iight of oiganic seaich iesults. These auveitisements
often contain links to the bianu anu to places wheie consumeis can buy the bianu.
The sponsoieu links aie geneiateu thiough the keywoiu-biuuing piocess useu by
seaich engines to sell au space on the seaich-iesults page.
If a competitoi to the bianu, like the bianu itself, bius on the bianu-name
keywoiu, theii aus coulu also appeai as sponsoieu links. The position of the
competitoi auveitisement on the seaich-iesults page, incluuing whethei its
auveitisement is piesenteu at all, uepenus in pait on whethei the au is ielevant to a
useis' queiy, which is measuieu in pait by the numbei of clicks it is likely to get, anu
on how much the auveitisei bius on the bianu-name keywoiu. As a iesult, when a
consumei queiies "uucci hanubag" in a seaich engine, she may enu up seeing
oiganic iesults anu sponsoieu links foi Kate Spaue hanubags in auuition to uucci-
ielateu links.


Shoulu couits piohibit oi limit this soit of keywoiu auveitising against
competitois. Similai questions aie being poseu aiounu the woilu as a iesult of
complaints by companies that seaich engines aie infiinging on the tiauemaiks of
bianu holueis anu confusing consumeis. Foi example, the Austialian Competition
anu Consumei Piotection Commission (ACCC) biought a case against uoogle in
connection with the sponsoieu links it sells to auveitiseis. The case aiose in pait
because some auveitiseis hau biu on theii competitois' names as keywoius anu
theii competitoi names appeaieu in the heauing of the auveitiseis' sponsoieu link.
The ACCC allegeu that uoogle was iesponsible foi the content of these
auveitisements anu that they weie likely to misleau consumeis in violation of
Austialian consumei piotection law.
1


1
The couit of fiist instance uisagieeu, holuing that uoogle, an inteimeuiaiy, shoulu not be helu
iesponsible foi the contents of these auveitisements. In the couit's view, oiuinaiy anu ieasonable
useis of uoogle's seaich engine woulu not be confuseu anu they woulu know that it was the
auveitiseis themselves, not uoogle, that ueteimineu the content of the auveitisements. The ACCC
appealeu anu the couit of fiist instance's juugment was ieveiseu. Austialia's Bigh Couit has since
agieeu to heai the case, anu a uecision is cuiiently penuing. Austialian Competition anu Consumei
Commission v uoogle Inc. |2u12j FCAFC 49.

S 14
This aiticle aigues that couits anu iegulatois shoulu be caieful about limiting
auveitising by competitois in this situation. Theie is extensive empiiical eviuence
that consumeis aie haimeu, as a iesult of highei piices anu pooiei piouucts, fiom
iestiictions on the ability of fiims to show consumeis infoimative anu compaiative
auveitisements.
2
0vei the last two uecaues, competition authoiities, couits, anu
legislatuies have lookeu skeptically at effoits by fiims to limit auveitising by theii
competitois. At the same time, theie is a stiong piesumption that consumeis
benefit when they obtain infoimation on competing piouucts in iesponse to a queiy
about a paiticulai bianu. Such compaiative infoimation is what consumeis aie
often looking foi anu what seaich engines have stiong financial incentives to
pioviue.
In auuition, haim fiom iestiictions on auveitising aie not limiteu to
consumeis. Businesses have a keen inteiest in iuentifying who theii competitois aie
selling to anu tiying to peisuaue those customeis to switch. That is the essence of
competition. 0sing bianu names as pait of keywoiu auveitising makes it easiei foi
fiims to finu consumeis who woulu be inteiesteu in leaining about theii piouuct. It
theieby incieases the intensity of competition foi customeis.
Companies can abuse keywoiu auveitising just like any othei foim of
auveitising, but theie aie well-uevelopeu legal anu enfoicement policies to ueal
with companies that tiy to misleau anu ueceive consumeis. Regulatois neeu to
stiike a piopei balance between, on the one hanu, encouiaging competition foi
consumeis, incluuing allowing messages that allow consumeis to compaie one
piouuct with anothei anu, on the othei hanu, piotecting consumeis fiom misleauing
anu ueceptive aus while piotecting bianus fiom uilution of theii tiauemaiks. In
stiiking that balance, couits anu iegulatois shoulu iecognize the veiy impoitant
contiibution that infoimative compaiative auveitising makes to competition.

GG< "#$ )$*+&,- .-/$,012134 5&30,&/$,2*

The basic constiuct of a seaich-iesults page is similai to tiauitional
auveitising-suppoiteu meuia. The page has content that attiacts the attention of
consumeis, namely the oiganic seaich iesults that aie ietuineu in iesponse to
enteiing ceitain keywoius. Auveitiseis pay to place aus on the seaich-iesults page.
The seaich-engine company, just like any auveitising inteimeuiaiy, ultimately
ueciues wheie to place the aus anu how they aie uisplayeu.
The uevelopment of seaich engines has, howevei, cieateu new ways foi
companies to ieach consumeis who might be moie specifically inteiesteu in

2
Timothy Nuiis, "Califoinia Bental Association v Feueial Tiaue Commission: The Revenge of
Footnote 17," !"#$%&% ()"$* +,)-)&., /%0.%12 vol. 8 (2uuu), pp. 26S-S1u.

4 14
leaining moie about theii piouucts.
S
In this way, the mechanics behinu a seaich
iesults page aie uiffeient fiom tiauitional meuia.
The unpaiu content of the seaich iesults page comes fiom an algoiithm that
tiies to uelivei the most ielevant iesults baseu on the keywoius the consumei has
typeu in. The paiu content of the seaich iesults page comes fiom a uiffeient
algoiithm that consiueis both the ielevance of the auveitisement to the usei's queiy
anu the maximum amount an auveitisei is willing to pay foi specific key woius.
4

The algoiithm ueteimines how many aus to place on the seaich-iesults page anu
wheie to place them.
S

Seaich engines have uiamatically ieuuceu the cost foi businesses of ieaching
consumeis. They pioviue companies with the ability to piomote themselves foi fiee
thiough the oiganic seaich iesults, anu have pioviueu a key iole in piomoting the
inuexing of websites anu theii content. As a iesult, companies invest in seaich-
engine optimization to help ensuie that consumeis will finu links to theii websites
when they type in ielevant key woius. This enables companies to match themselves
with piospective customeis anu infoim those customeis about the uses anu
chaiacteiistics of theii piouucts.
Seaich engines also pioviue companies with the ability to pay foi auveitising
anu theieby inciease theii chances of ieaching ielevant consumeis. Foi example, a
new tapas bai in Boston coulu buy seaich-aus on uoogle using the keywoius "tapas
bai iestauiant Boston South Enu" anu achieve the top left spot on the fiist seaich-
iesults page foi $S.16 a click if it hau up to $1uu pei uay to spenu. It woulu not pay
at all unless useis actually clickeu on the aus.
6

The keywoiu contioveisy iesults fiom the ability of auveitiseis to biu on
keywoius that coiiesponu to competing bianu names in oiuei to enhance the
likelihoou of ieaching all consumeis inteiesteu in puichasing a ceitain type of
piouuct. Foi example, when one of the authois typeu in "uucci hanubag" into
uoogle, the iight-hanu siue of the seaich iesult page, labeleu cleaily as "sponsoieu
links," containeu aus in the 7
th
(Noiustiom.com) anu 9
th
(coutuie.com) position foi
thiiu paity websites.
7
0pon clicking the link, hanubags fiom many bianus besiues

S
Foi a geneial intiouuction, see Baviu Evans, "The Economics of the 0nline Auveitising Inuustiy,"
/%0.%1 )3 4%*1)$5 +,)-)&.,6, vol. 7, No. S, Septembei 2uu8.
4
In assessing ielevance, some seaich engines, such as uoogle, use a "quality scoie." Factois that
ueteimine the quality scoie incluue the histoiical click thiough iate foi the au, the click thiough iate
foi the uil foi the auveitisei, anu the quality of the lanuing page foi the au, among otheis. See
http:suppoit.google.comauwoiusbinanswei.py.hl=en&answei=24S4u1u.
S
Aus on the fiist page aie moie valuable to auveitiseis than those placeu on the seconu anu
subsequent seaich iesults pages. Seaich engines pioviue guiuance on how much an auveitisei neeus
to biu to get on the fiist page.
6
Baseu on infoimation gatheieu by a Boston-baseu ieseaichei on 27 }uly 2u12.
7
Baseu on submitting a queiy on fiom a computei in the Boston aiea on 26 }uly 2u12. Results foi
queiies fiom uiffeient locations anu times may uiffei.

S 14
uucci coulu be puichaseu. Both Noiustiom anu coutuie.com might have enteieu
"uucci hanubag" as one of theii keywoius anu biu on them. Noiustiom anu
coutuie.com might have been able to get theii aus uisplayeu on the top of the page,
oi highei in the stack on the iight-hanu siue of the page, if they hau paiu moie foi
"uucci hanubag," assuming that theii auveitisements weie otheiwise ielevant to the
useis' queiy.
8

0f couise, the bianu whose name consumeis have useu in the queiy woulu
most likely piefei that consumeis not see infoimation about the bianu's
competitois. But seaich engines, like all auveitising suppoiteu meuia, aie two-siueu
platfoims, with two sets of customeis whose welfaie neeus to be consiueieu.
9
It is
not at all obvious that consumeis who type in the name of one bianu aie haimeu
when they see auveitisements foi anothei bianu. Consumeis may be peifoiming
wiuespieau seaiches anu compaiisons anu not just looking foi a paiticulai venuoi.
Even if they uiun't intenu to uo a wiuespieau seaich they may value the
seienuipitous finuing that theie aie alteinatives anu value seaich-engine platfoims
that pioviue auuitional infoimation. In some cases, consumeis may intentionally
type in a bianu name because they know that it will tenu to uisplay iesults foi othei
luxuiy piouucts. It woulu theiefoie seem likely that consumeis woulu 7%-%3.* fiom
seeing infoimation on othei alteinatives. Inueeu, the seaich engine has stiong
incentives to uelivei useful seaich iesults to consumeis because that is how it
geneiates the tiaffic that it sells to auveitiseis.
Some of the keywoiu auveitising uecisions to uate have hingeu on whethei
the couits believeu that consumeis coulu uistinguish between the bianu name they
typeu in anu the sponsoieu links that appeai foi competitois.
1u
0thei uecisions have
consiueieu the extent to which the seaich-engine inteimeuiaiy is liable foi allegeu
confusion causeu by sponsoieu links that uisplay auveitisements fiom counteifeit
sites.
11
Fiom the stanupoint of social welfaie, howevei, the couits anu iegulatois

8
An auveitisei cannot just pay moie to get a bettei spot on the seaich-iesults page since the
allocation of sponsoieu links to spots uepenus both on bius anu the quality scoie. Foi instance, if a
company bius on a keywoiu anu its lanuing page anu auveitisement aie completely iiielevant to a
useis' queiy, the au is not likely to appeai no mattei how much the auveitisei bius. Neveitheless,
biuuing moie incieases the likelihoou of getting bettei spots, anu having an auveitisement that is
moie likely to be clickeu will also inciease the piobability of getting a bettei spot.
9
Simon P. Anueison anu }ean }. uabszewicz, (2uu6). "The Neuia anu Auveitising: A Tale of Two-Siueu
Naikets," 89-:7))5 )3 *;% +,)-)&.,6 )3 <$* 9-: ("=*"$%, eus. victoi uinsbuigh anu Baviu Thiosby,
Elseviei B.v.,
1u
In /)6%**9 !*)-%2 >*:? 0? @))A=% B-,., 7Su F. Supp. 2u SS1 (2u1u), the uistiict couit uismisseu claims
biought by Rosetta Stone holuing that "no ieasonable tiiei of fact coulu finu that uoogle's piactice of
auctioning Rosetta Stone's tiauemaiks as keywoius tiiggeis to thiiu paity auveitiseis foi use in theii
Sponsoieu Link titles anu text cieates a likelihoou of confusion as to the souice oi oiigin of Rosetta
Stone's goous." The Fouith Ciicuit has since ieveiseu anu iemanueu the case. !%% /)6%**9 !*)-%2 >*:?
0? @))A=% B-,?, 676 F.Su 144 (4
th
Cii. 2u12).
11
Austialian Competition anu Consumei Commission v uoogle. Inc. |2u12j FCAFC 49.

6 14
shoulu balance the costs stemming fiom confusion, when in fact this occuis, with
two othei consiueiations.

(1) The benefits that consumeis who aien't confuseu get fiom moie
infoimation, incluuing compaiative infoimation, anu incieaseu
competition.
(2) The inuiiect effects of couit anu iegulatoiy uecisions that inciease
the iisks to seaich engine inteimeuiaiies of helping businesses
taiget anu infoim consumeis who have expiesseu inteiest in theii
iivals.

We ietuin to this cost-benefit analysis latei.

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Although seaich-baseu auveitising is still in its teens, taigeting the
customeis of competitois isn't new, only the technology is uiffeient. Bianu-name
baseu keywoiu auveitising is similai in many iespects to othei piactices that fiims
have tiauitionally engageu in, anu that inteimeuiaiies help these fiims engage in, to
taiget theii iival's customeis.
It has always maue business sense foi companies to taiget theii competitois'
customeis. Those consumeis have alieauy signaleu that they aie inteiesteu in a
similai piouuct. In many cases a competitoi's customeis aie moie likely sales
piospects than people selecteu in some othei way. A new company in a ielatively
matuie maiket will want to position its piouuct by making a compaiison to a
iefeience piouuct. This is usually an effective means of communicating with the
consumei anu pioviuing infoimation about the quality of the piouuct. In many
instances, a new entiant uoes not have much choice but to make iefeience to
anothei competing piouuct in oiuei to peisuaue the customeis of incumbents to
switch anu will want to taiget them. In almost all these cases the iival entiant is
using infoimation geneiateu by the incumbent bianu anu theiefoie coulu be
accuseu of fiee iiuing.
Fiims base new locations in pait on wheie theii iivals have locateu. In some
cases they may ueciue they uo not want to be neai iivals to maximize theii maiket
shaie. But in othei cases they may ueciue to locate iight next to iivals because they
iealize an exteinality fiom the foot tiaffic geneiateu by theii iivals. Some of the
people who aie attiacteu to the iival might be attiacteu to them. They aie fiee

7 14
iiuing in anothei way as theii iival may have iuentifieu a location that is paiticulaily
goou foi theii piouuct.
12

Bianus also pay slotting fees foi placement on supeimaiket shelves. Those
fees uepenu in pait on the position on the shelf. Typically, similai piouucts aie
placeu togethei so that consumeis get an oppoitunity to ieview piouuct bianus
ielative to each othei. As a iesult, if a consumei goes to buy Kellogg's Coin Flakes at
a Supeiama in Nexico City she will go to a ceieal aisle wheie, suiiounuing Kellogg's
ceieals, she will see seveial othei bianus incluuing Quakei, Post, uianvita, Bimbo,
Naizoio anu Nutiisa. Any new entiant into the ceieal business will be placeu in that
aisle anu establisheu bianus like Kellogg's oi Bimbo will have no say in the
supeimaiket's uecision.
Naiketing companies also collect infoimation on what piouucts consumeis
have bought.
1S
They sell that infoimation to iival companies that will enable them to
taiget those consumeis. Foi example, if a consumei buys Pampeis she may ieceive a
coupon fiom Buggies. Some ietail stoies also use consumei puichase uecisions to
piomote iival piouucts. Foi example, if you buy ibupiofen, a pain ielievei, unuei the
bianu name Auvil at CvS Phaimacy you may get a coupon to tiy the CvS geneiic
veision of ibupiofen.
These situations involve essentially the same issues as in bianu-name baseu
keywoiu auveitising. The communication between the inteimeuiaiy anu the
company that wants to know about its iival's customeis will typically involve a
iequest that ielates to the bianu name of the iival: "tell me what ietail stoiefionts I
coulu ient neai Staibucks," "tell me who bought Buggies", oi "put me neai the
Kellogg's ceieals." All of these situations involve tiauing on infoimation involving
consumei puichases of a iival's piouucts.
14
Keywoiu auveitising uiffeis fiom these
situations mainly in its immeuiacy: foi example, iathei than having to wait foi a
consumei to buy a piouuct, get iecoiueu in a uatabase, anu have that infoimation
conveyeu, a fiim can use a seaich engine's tools to catei to consumeis in ieal-time
as they seaich foi iivals' piouucts.
Keywoiu auveitising using bianu names helps companies compete foi a
common pool of customeis. It makes it possible foi fiims to let people that have
expiesseu inteiest in a bianu, in paiticulai by conuucting a seaich using the name of
this bianu, know that theie is a competing alteinative. As with othei methous foi
taigeting a iival's customeis, keywoiu auveitising incieases competition foi

12
Anuiea Shepaiu stuuieu this in the case of gasoline stations, which tenu to clustei aiounu each
othei insteau of spieauing out ovei a given location. See Anuiea Shepaiu (1991). "Bisciimination anu
Retail Configuiation," C)"$-9= )3 D)=.*.,9= +,)-)&E, vol. 99, No. 1, pp. Su-SS.
1S
In the 0niteu States, companies that pioviue this seivice incluue Affinity Solution, Catalina
Naiketing, anu FieeNonnee.
14
Like keywoiu auveitising in some cases the inteimeuiaiy coulu pass on infoimation to a fiim that
offeis a counteifeit piouuct anu is otheiwise tiying to ueceive the consumei.

8 14
consumeis anu likely impioves customei satisfaction by enabling a bettei match
between customeis anu piouuceis at ieuuceu piices anu bettei quality. Anu, as with
othei methous, keywoiu auveitising makes it easiei foi new fiims to entei anu
compete with establisheu playeis.


G>< "#$ =@&3&61@2 &( .-/$,012134 83- G02 %$20,1@01&3


Keywoiu auveitising geneially pioviues concise infoimation on fiims. Nost
impoitantly, it enables a consumei to click on a link that takes the consumei to a
website wheie the consumei can obtain moie infoimation anu buy the piouuct.
Keywoiu auveitising also incluues a small amount of othei basic infoimation
unueineath the link. That is, it typically involves what is calleu "infoimative
auveitising."
1S

Economists have founu that infoimative auveitising is a maiket solution to a
pioblem of impeifect infoimation anu as such has impoitant piocompetitive effects.
Infoimative auveitising helps people finu infoimation about piice anu piouuct
featuies. Foi commouity piouucts it enables consumeis to seaich foi the best piice
anu location. Foi uiffeientiateu piouucts auveitising helps consumeis finu the best
piouuct that meets theii neeus. In paiticulai, by enabling piouuceis to auveitise the
chaiacteiistics of theii piouucts, possibly in compaiison to othei piouucts, it helps
consumeis anu piouuceis finu the best matches.
Infoimative auveitising is especially impoitant foi companies that aie tiying
to intiouuce new piouucts, whethei those aie establisheu companies oi staitups.
Naking consumeis awaie of these new piouucts is likely to be impoitant. Foi one,
new piouucts can inciease social welfaie consiueiably, a subject that has ieceiveu
consiueiable attention by economists.
16
In intiouucing a new piouuct to ietaileis, a
manufactuiei may use heavy auveitising, foi example. The manufactuiei may also
engage in significant auveitising to countei switching costs anu geneial consumei

1S
Foi an oveiview, see Keith Bagwell (2uu7), "The Economic Analysis of Auveitising", in N.
Aimstiong anu R. Poitei eus., F;% 89-:7))5 )3 B-:"6*$.9= G$A9-.H9*.)-, vol. S, Amsteiuam: Noith
Bollanu. Some economists have aigueu that "peisuasive auveitising," such as the kinu fiequently
seen on television, uoes not pioviue any value to consumeis anu iesults in highei piices as
auveitiseis iecoup theii costs, while otheis have aigueu that peisuasive auveitising has seveial
positive featuies that ultimately benefit consumeis. This uebate isn't ielevant heie since the foimat
of keywoiu auveitising typically is not conuucive to peisuasive auveitising.
16
}eiiy A. Bausman, "valuation of New uoous 0nuei Peifect anu Impeifect Competition," in F;%
+,)-)&.,6 )3 4%1 @)):6 (Chicago: 0niveisity of Chicago Piess, 1996), pp. 2u7-248, anu Amil Petiin
(2uu2), "Quantifying the Benefits of New Piouucts: The Case of Ninivan," C)"$-9= )3 D)=.*.,9=
+,)-)&E, vol. 11u, No. 4, pp. 7uS-729, to name only a few.

9 14
ineitia. 0ne stuuy founu that infoimative auveitising baseu on compaiisons with
existing bianus is paiticulaily helpful foi new bianus to establish themselves.
17

The best way to see the impoitance of infoimative, incluuing compaiative,
auveitising to competition is to look at what happens when this soit of auveitising
is limiteu oi banneu. Economists who have stuuieu vaiious attempts by
goveinments anu tiaue associations to iestiict auveitising have founu
oveiwhelmingly that these iestiictions haim consumeis by iaising piice anu
loweiing quality.
The classic stuuy by Lee Benham founu that optometiist piices in 0.S. states
that piohibiteu auveitising by this piofession weie 2S peicent highei than in states
that uiu not piohibit auveitising.
18
Subsequent stuuies extenueu anu confiimeu his
analysis. Kwoka, foi example, testeu the claim that auveitising ieuuces piices anu
quality foi optometiic seivices. Be founu that aveiage maiket quality is gieatei with
auveitising anu that theie aie consiueiable social benefits fiom loosening
auveitising iestiictions.
19
Noie iecent stuuies, exploiting moie sophisticateu
computational techniques, such as Baas-Wilson anu Savoca's stuuy into pioviuei
choice foi contact lenses have put an emphasis on the significant effects of
auveitising limits anu iegulation on consumei choices, a lesson that shoulu not be
lost when consiueiing new iestiictions on auveitising.
2u

Economists also have lookeu at these same effects on othei piouucts anu
seivices, incluuing legal seivices, anu piesciiption uiugs sales at the ietail level.
Following Benham's classification of iestiictive vs. non-iestiictive states in teims of
auveitising iegulations, Cauy estimateu the cost to consumeis of imposing limits to
auveitising foi piesciiption uiugs at $1SS to $1S2 million in 197u (almost 4 peicent
of total piesciiption uiug sales). Be founu that auveitising piohibitions anu
limitations iesulteu in highei ietail piices in phaimacies foi these uiugsa net
tiansfei fiom consumeis to ietaileis.
21
In legal seivices, Nuiis anu NcChesney, foi
example, founu cost-savings iesulting fiom incieaseu auveitising, mainly uue to
incieaseu volume. They also auuiesseu conceins about potential quality ieuuctions

17
Bhiuv uiewal, Sukumai Kavanooi, Euwaiu F. Fein, Caiolyn Costley anu }ames Baines (1997),
"Compaiative veisus Noncompaiative Auveitising: A Neta-Analysis," C)"$-9= )3 I9$5%*.-A2 vol. 61,
No. 4, pp. 1-1S.
18
Lee Benham (1972), "The Effect of Auveitising on the Piice of Eyeglasses" C)"$-9= )3 >91 9-:
+,)-)&.,6, vol. 1S, No. 2, pp. SS7-SS2.
19
}ohn E. Kwoka (1984), "Auveitising anu the Piice anu Quality of 0ptometiic Seivices", F;%
<&%$.,9- +,)-)&., /%0.%1, vol. 74, No. 1, pp. 211-216.
2u
Beboiah Baas-Wilson anu Elizabeth Savoca (199u), "Quality anu Pioviuei Choice: A Nultinomial
Logit-Least- Squaies Nouel with Selectivity", 8%9=*; !%$0.,%6 /%6%9$,;, vol. 24, No. 6, pp. 791-8u9.
The authois note: "We see that the auveitising anu licensing iestiictions have the laigest effects on
consumei choices. When auveitising is piohibiteu, the piobability of selecting an optometiist uiops
fiom 69 peicent to 49 peicent."
21
}ohn F. Cauy (1976), <- +6*.&9*% )3 *;% D$.,% +33%,*6 )3 /%6*$.,*.)-6 )- J$"A D$.,% <:0%$*.6.-A,
Economic Inquiiy, vol. 14, No. 4, p. 49S.

1u 14
iesulting fiom incieaseu auveitising, concluuing that lowei piices uo not leau to
lowei quality in theii stuuy.
22
Cox et al, also ieviewing legal seivices, lookeu at
ioutine legal seivices in 17 metiopolitan aieas in the 0.S. anu founu that auveitising
exeits a uownwaiu piessuie on piices anu that the amount of time expenueu in
offeiing ioutine seivices will consequently fall, leauing to moie efficient levels of
quality offeieu.
2S

Almost all of the numeious subsequent stuuies of uiveise inuustiies have founu
similai iesults foi quality as well as piices.
24
Restiicting infoimative keywoiu
auveitising is likely to have the same soit of auveise effects on competition.

>< J&/$,36$30 K&'1@* "&+8,-2 .-/$,012134 %$20,1@01&32

Bistoiically, theie weie many iestiictions on the ability of fiims to auveitise.
Tiaue associations imposeu many of these iestiictions on theii membeis. In othei
cases goveinments imposeu iestiictions as a iesult of lobbying effoits by inuustiy
inteiests. Beginning with effoits by the 0.S. Feueial Tiaue Commission in the
197us, competition authoiities anu othei policymakeis have iecognizeu that these
iestiictions weie anticompetitive anu have woikeu towaius eliminating them.
Bespite this, theie is continual piessuie to limit auveitising.
The FTC began attacking auveitising iestiictions in the 197us.
2S
In 1978 the
FTC pieempteu state auveitising piohibitions by issuing the "Tiaue Regulation Rule
on Auveitising of 0phthalmic uoous anu Seivices." A yeai latei it challengeu
vaiious auveitising iestiictions in piofessional coues of ethics foi the Ameiican
Neuical Association anu Ameiican Bental Association. Buiing the 198us it
challengeu vaiious iestiictions by state boaius that iegulate piofessions. As Beales
has obseiveu, "|tjhese wiuely suppoiteu commission actions ieflect the belief that
tiuthful auveitising is an impoitant competitive weapon that shoulu be
encouiageu." Some of these iestiictions in question involveu bianu compaiisons.
The FTC concluueu, howevei, "|cjompaiative auveitising, when tiuthful anu non-
ueceptive, is a souice of impoitant infoimation to consumeis anu assists them in

22
Timothy }. Nuiis anu Fieu S. NcChesney (1979), "Auveitising anu the Piice anu Quality of Legal
Seivices: The Case foi Legal Clinics", <&%$.,9- K9$ L)"-:9*.)- /%6%9$,; C)"$-9=, vol. 4, No. 1, pp. 179-
2u7.
2S
Steven R. Cox, }ohn R. Schioetei anu Scott L. Smith (198S), "Attoiney Auveitising anu the Quality of
Routine Legal Seivices, /%0.%1 )3 B-:"6*$.9= G$A9-.H9*.)-, 2, S4u-SS4 anu }ohn R. Schioetei, Scott L.
Smith anu Steven R. Cox, (1987) "Auveitising anu Competition in Routine Legal Seivice Naikets: An
Empiiical Investigation", F;% C)"$-9= )3 B-:"6*$.9= +,)-)&.,6, vol. S6, No. 1, pp. 49-6u.
24
See Nuiis, above, foi a suivey anu citations to the uozens of stuuies that have been uone.
2S
}. Bowaiu Beales III (1991), "What State Regulatois Shoulu Leain fiom FTC Expeiience in
Regulating Auveitising," C)"$-9= )3 D"7=., D)=.,E M I9$5%*.-A, vol. 1u, No. 1, pp. 1u1-117.

11 14
making iational puichase uecisions. Compaiative auveitising encouiages piouuct
impiovement anu innovation, anu can leau to lowei piices in the maiketplace."
26

In Euiope, iestiictions on auveitising weie moie seveie anu long liveu than
in the 0.S., wheie many countiies continueu to have laws that piohibiteu oi
iestiicteu auveitising well into the 199us. Even the 0niteu Kinguom, a juiisuiction
with iegulatoiy stanuaius moie akin to the 0.S., piohibiteu compaiative auveitising
until 1994. When the Euiopean 0nion lookeu into iationalizing these policies it
ueciueu to enu them laigely anu publisheu a uiiective in Apiil 2uuu, to haimonize
its laws on compaiative auveitising. In its pieamble, the E0 Biiective emphasizeu
the impoitance of compaiative auveitising as a consumei uecision-making tool anu
a stimulus of competition. It theiefoie alloweu compaiative auveitising.
27
As in the
0.S., iestiictions on auveitising continue to be a competition concein as the E0's
Commission noteu in its 2uu4 "Repoit on competition in Piofessional Seivices",
which asks iegulatoiy authoiities anu piofessional bouies in Nembei States to put
in place pio-competitive anu tianspaiency-enhancing mechanisms that can
empowei consumeis.
28,29
In fact, the 2uu6 Nisleauing anu Compaiative Auveitising

26
Statement of Policy Regaiuing Compaiative Auveitising, Feueial Tiaue Commission, Washington,
B.C., August 1S, 1979. This policy statement has hau a long lasting impact in uiiecting the FTC's
appioach to auveitising as can be seen thioughout vaiious actions anu uecisions by the FTC since
then. Foi example, in 1994, the Commission issueu consent oiueis baiiing bouy aimoi piouuceis'
association fiom iestiicting the use of compaiative auveitising Peisonal Piotective Aimoi Ass'n, 117
F.T.C. 1u4, 1u7-u8 (1994); likewise, in Aiiz. Auto Bealeis Ass'n, 117 F.T.C. 781, 784-8S (1994), it
issueu a consent oiuei piohibiting the association fiom iestiictive non-ueceptive auveitising
behaviois. A iecent case wheie iestiaints on auveitising weie ueemeu to have negative effects on
competition is Polygiam Boluing v. Feueial Tiaue Commission, 416 F.Su 29, SS (B.B.C. 2uuS) wheie
a lowei couit's uecision was affiimeu in consiueiing that a "moiatoiium on auveitising" with iespect
to piouucts not pait of the joint ventuie was anticompetitive, anu fuithei noting that "such iestiaints
by theii natuie tenu to iaise piices anu ieuuce output". The moie peimissive appioach towaius
compaiative auveitising, howevei, is oluei than the 1979 policy statement as can be gleaneu foim
piioi case law: Bates v. State Bai of Aiizona, 4SS 0.S. SSu, 78S (1977), stateu that "piice auveitising
plays an impoitant iole in the allocation of iesouices in a fiee enteipiise system". Even in the 196us,
in Feueial Tiaue Commission v. Pioctoi & uamble Co., S68 0.S. S68, 6uS-u4 (1967) the uecision
noteu that "|pjiopei auveitising seives a legitimate anu impoitant puipose in the maiket by
euucating the consumei as to available alteinatives" anu is an aspect of "healthy competition".
27
0nuei the Biiective compaiative auveitising is alloweu pioviueu it uoes not misleau, it compaies
like with like, uoes not confuse, uiscieuit oi take unfaii auvantage of a iival's tiauemaik oi piesents
goous as imitations of those beaiing a piotecteu name
28
Baiigozzi, F. anu N. Peitz, "Compaiative Auveitising anu Competition Policy," /%,%-* F$%-:6 .-
<-*.*$"6*N F;%)$E 9-: +0.:%-,%, Cambiiuge, NA: The NIT Piess, 2uu6, pp. 21S-26S.
29
This oveiaiching iegulatoiy piinciple is ieflecteu in the case law of the Euiopean Commission,
which has consistently tieateu agieements that stifle auveitising as anticompetitive. Foi example, in
the <"6*$.9- K9-56 O>)&79$: <A$%%&%-*P case, the Commission citeu "the ienunciation of auveitising
lenuing anu ueposit iates" as an avoiuance of competition at an infoimation level anu thus an object-
baseu iestiiction of competition (Case S6.S71, 11 }une 2uu2, |2uu4j S CNLR S99, paiagiaph 79).
Similaily, in the +=%,*$.,9= 9-: &%,;9-.,9= ,9$7)- 9-: A$9#;.*% #$):",*6 case the Commission
concluueu that an "agieement not to auveitise oi paiticipate in sales exhibitions can . be consiueieu
a foim of avoiuing competition anu maintaining existing maiket shaie" (Case S8.SS, S Becembei

12 14
Biiective explicitly iecognizes that compaiative auveitising "may be a legitimate
means of infoiming consumeis of |supplieis'j auvantage".
Su

0f couise, neithei the 0.S. noi the E0 enuoises untiuthful oi ueceptive
auveitisements. Bowevei, the FTC in paiticulai has iecognizeu that the
piocompetitive benefits of auveitising aie so stiong that policymakeis neeu to be
caieful in iestiicting auveitising on the giounus that it is misleauing. As iecently as
2uu7, in opposing state iestiictions on legal auveitising the Commission obseiveu:
S1


Couits anu othei state policy makeis shoulu be caieful not to iestiict
unnecessaiily the uissemination of tiuthful anu non-misleauing auveitising
that may help consumeis make moie infoimeu choices. 0veily bioau
iestiictions of tiuthful anu non-ueceptive infoimation aie likely to haim
consumeis of legal seivices by uenying them useful infoimation anu
impeuing competition among attoineys. Accoiuingly, consumeis aie bettei
off when policy makeis auuiess conceins about potentially ueceptive
auveitising with naiiowly tailoieu iestiictions.

The FTC's call foi states to "naiiowly tailoi" any iestiictions imposeu on potentially
ueceptive auveitising iecognizes that useis' inteiests aie seiveu by allowing fiims
to piesent them with as many options as possible, so they can make moie infoimeu
puichasing choices.

>G< "#$ K,&0$@0134 5&67$010&,2 &, K,&0$@0134 .481320 5&32H6$,
5&3(H21&3L

Nouein competition policy iecognizes that its puipose is to piotect
competition, foi the ultimate benefit of consumeis. Couits anu competition
authoiities, to vaiying uegiees aiounu the woilu, have become piopeily skeptical of
appeals by fiims foi piotection against theii competitois in the absence of
uemonstiation that consumeis ultimately lose. In the 0.S., foi example, couits no
longei consiuei piotecting the health of small businesses foi its own sake.

2uuS, |2uuSj CNLR 1u62, paiagiaph 24u); anu in L.-% <$* <",*.)- 8)"6%6 (Case C0NPS7.784, Su
0ctobei 2uu2, C0N(2uu2)428S, paiagiaph 172), the Commission ueciueu that an agieement not to
incluue maiket shaie uata in maiketing mateiials constituteu a uistoition of competition.
Su
Biiective 2uu6114EC of the Euiopean Pailiament anu of the Council of 12 Becembei 2uu6,
Recital 8, 0} L S76 of 27 Becembei 2uu6.
S1
Biief of the Feueial Tiaue Commission as <&.,"6 ("$.9% Suppoiting Aiguments to vacate 0pinion
S9 of the Committee on Attoiney Auveitising Appointeu by the Supieme Couit of New }eisey, In the
Nattei of the Petition foi Review of Civil Action Committee on Attoiney Auveitising 0pinion S9. In
the Supieme Couit of New }eisey Bocket No. 6u,uuS. See www.ftc.govbevu7uuuSopinionS9.puf.

1S 14
Couits anu iegulatois neeu to keep the inteiests of consumeis, anu not
competitois, fiont anu centei in evaluating keywoiu-auveitising iestiictions
involving the use of bianu names. In evaluating keywoiu-auveitising claims anu
theii haim to competition, couits anu iegulatois neeu to weigh the cost of
iestiictions against the benefits fiom limiting confusion. As uiscusseu above,
keywoiu auveitising likely benefits consumeis because it:

offeis consumeis moie infoimation, ieuuces theii seaich costs anu
gives them ieauy access to competitive alteinatives;
loweis the cost to fiims of ieaching theii customeis anu theieby
loweis the cost of uoing business, making it easiei to entei anu
challenge existing bianus; anu,
intensifies competition between name bianus anu theii iivals anu
theieby likely loweis piices anu impioves quality.

Recently, some companies have useu the appeaiance of the ielatively new
keywoiu auveitising technology to aigue foi iestiicting auveitising by theii
competitois. They uon't want theii iivals to use the fact that a consumei has
expiesseu an inteiest in theii bianu nameby typing in the bianu name as pait of
the keywoius foi seaichto ieach those customeis.
In evaluating pioposals to iestiict keywoiu auveitising such as these,
iegulatois anu couits neeu to account foi the fact that most consumeis aien't
confuseu by the piactices at issue anu aie, in fact, likely to benefit fiom them foi the
ieasons mentioneu above. Foibiuuing seaich engines fiom using tiauemaikeu
names at all as seaich teims woulu likely have a significant cost to consumeis by
eliminating an easy iefeience with which to compaie existing oi new piouucts,
iesulting in impoitant ieuuctions in consumei benefits. Even moie naiiow
iemeuies such as case-specific penalties foi causing consumei confusion coulu
uiscouiage seaich engines fiom offeiing this seivice to auveitiseis, uecieasing theii
value to consumeis as a seaich tool anu iesulting in significant haim.
S2

New means of auveitising, such as keywoiu auveitising thiough seaich
engines, shoulu not piecluue the stiict technical analysis that has leu couits anu
iegulatois in the iecent past to exeicise extieme caution in consiueiing attempts to
limit competitive auveitising. As in othei moues of auveitising the costs of
iestiicting compaiative auveitising can be highei than the likely benefits anu these

S2
Couits anu iegulatois woulu also neeu to take the costs of keywoiu auveitising iestiictions into
account in stiiking the iight balance between pioviuing businesses the incentives to invest in bianu
names anu secuiing a ietuin on theii iisky investments anu shieluing these fiims fiom the iigois of
competition.

14 14
iestiictions aie likely to involve piotecting competitois iathei than consumeis, just
like befoie.