An economic approach to the regulation of direct marketing.

• Author: Shiman, Daniel R.

1. INTRODUCTION II. THE GROWTH OF DIRECT MARKETING A. Public Reaction to Direct Marketing B. The Literature on Direct Marketing III. THE FRAMEWORK FOR ANALYSIS OF THE VOLUME PROBLEM A. The Mathematical Model B. An Example of Welfare-Reducing Marketing IV. APPLYING THE BASIC FRAMEWORK V. THE IMPACT OF OTHER FACTORS ON THE ANALYSIS A. Variation by Individual in Direct Marketing's Impact B. Variation in Impact According to the Source and Type of Direct Marketing C. Impact on Third Parties D. Impact of Economic and Technological Factors on Sending and Receiving Costs E. Impact of Changes in Volume and Targeting in Traditional Channels F. Viewing Communications Media as Alternative Marketing Channels VI. AVAILABLE SOLUTIONS TO THE PROBLEM A. Receiver-Deployed Solutions B. Industry-Deployed Solutions C. Solutions Imposed by a Government, Message Intermediary, or Controlling Organization VII. CONCLUDING REMARKS I. INTRODUCTION

   In the last thirty years of the twentieth century, the volume of direct marketing received through the traditional channels of mail and telephone increased rapidly. (1) More recently, new electronic media for communications have developed, such as fax, e-mail, and instant messaging, and new personal communications devices have appeared, such as wireless phones and e-mail devices, which have made communications easier, cheaper, and more immediate. The growth of direct marketing in traditional and new media has raised concerns about an important privacy issue, the right to not be intruded upon or annoyed by unsolicited mail, telephone calls and electronic messages (i.e., the "right to be let alone"). As a result there has been a substantial increase in the demand for legislation to regulate direct marketing in recent years. In the last two decades, legislation has been passed by Congress and state legislatures to regulate direct marketing in various media, including the establishment of do-not-contact lists for some media (e.g., telemarketing), and the outright ban of unsolicited commercial messages for other media (e.g., unsolicited commercial faxes).

   Policymakers have had to balance the benefits derived from direct marketing (and firms' free speech rights) with receivers' rights to privacy. While direct marketing can improve the flow of information about products available to consumers, and therefore provides a benefit to buyers, it also generates a negative externality, since nonbuyers are also forced to expend time, effort, and sometimes money processing advertising messages. A large volume of poorly-targeted direct marketing messages can therefore place a significant burden on consumers' time, patience, and resources. Indeed, if the volume of advertising messages on a particular communications medium is heavy enough, consumers may be deterred from using that medium for their communications needs. Thus, direct marketing can affect the usefulness, and even the viability, of a communications medium.

   This Article demonstrates how economic social welfare analysis can provide guidance to policymakers who are considering whether to regulate direct marketing in various media, and what forms of regulations are most effective. The key factors that determine where the problem is likely to be greatest are identified and analyzed to help determine in which media the intrusion of direct marketing on receivers' privacy is likely to be the most troublesome. The Article discusses how the recent rise in complaints about direct marketing and demands for regulation is caused mostly by changes in the technological environment, which have increased the volume of direct marketing sent out and lowered direct marketing's value to consumers, thus raising its total cost to receivers. Of particular importance are the development of new inexpensive means of communication, such as e-mail and electronic messaging, the use of mobile personal communications devices, which increase the immediacy of communications, and improvements in information technology, which have lowered the cost and increased the profitability of conducting a mass direct marketing campaign. The Article also discusses the various solutions available, which can be deployed by receivers, senders, or imposed by the government or the organization or firm that controls the communications medium.

2. THE GROWTH OF DIRECT MARKETING

   The use of direct marketing by advertisers has grown rapidly in the last few decades. Much of this growth occurred in the traditional direct marketing outlets, such as direct mail and telemarketing. In the late 1970s and 1980s the volume of direct mail increased rapidly, as shown in Figure 1. Between 1975 and 1988 in particular, the number of direct mail pieces received per capita jumped by 133%. (2) The likely causes of this increase are the fall in information technology and communication costs, the general increase in demand for advertising, and the increased information firms have about consumers. (3) In 2003, 54% of the total mail volume received by households was direct mail advertising and fundraising, about thirteen pieces per week per household. (4) (See infra Figure 1.)

   [FIGURE 1 OMITTED]

   Telemarketing grew even more rapidly in this time period than direct mail. Expenditures on outbound telemarketing increased annually by 10.3% from 1978 to 1996, versus 5.7% for direct mail. (5) By 1998, more was being spent by marketers on outbound (from firms to consumers) telemarketing, $58.9 billion, than on direct mail advertising, $39.7 billion. (6)

   Direct marketers have been quick to utilize new communications and information technologies to help them advertise their products directly to potential and existing customers. As fax machines became common in commercial establishments, firms attempted to advertise their products by sending unsolicited faxes. (7) Advertising on the Internet has grown rapidly, much of it in the form of Unsolicited Commercial Emails ("UCE" or "spam"). It has been estimated that about 80% of all e-mail was spam in 2004. (8) There has also been substantial posting of advertisements on Internet forums and bulletin boards and on Usenet, (9) Internet mailing lists, (10) and discussion groups. (11) Some countries in Asia and Europe where Short Message Service ("SMS") text messaging is heavily used have seen large volumes of unsolicited advertising appear on text messages to mobile devices. (12) There are now predictions that commercial advertising will soon appear on instant messaging ("spim"), (13) IP telephony, (14) and telemarketing calls to wireless phones. (15)

   1. Public Reaction to Direct Marketing

      The growth of unsolicited advertising in the traditional channels of direct mail and telemarketing, and the new channels of advertising by fax, e-mail, Internet forums, and electronic messaging, has attracted public attention and concern. There has been an increase in the number of articles on direct marketing in the news media, including newspaper editorials and magazine cover stories. (16) Public opinion surveys suggest that the public is quite concerned about the volume of direct marketing received. The number of people who wish they received less advertising mail rose from 30% in 1987 to 49% in 1998 to 63% in 2003. (17) In 1994, 86% of the public said they wished they got fewer telemarketing calls. (18) Meanwhile 90% of Internet users responding to a survey in November 2003 said they found UCE annoying, and 74% wanted it banned. (19) Large numbers of Web sites have been created to protest direct marketing, and organizations have been set up to encourage legislation that would regulate telemarketing and spam. (20)

      Policymakers have responded by conducting hearings, passing legislation, and implementing new rules, to regulate some forms of direct marketing. (21) Yet some forms of direct marketing have received more attention and legislation and are heavily regulated (or even banned), while other forms have appeared to spark less concern and have been less regulated. For example, despite the attention given in the media (22) and in congressional hearings, (23) direct mail has not been regulated, and there appears to be little public pressure to regulate it in the near future. (24)

      Telemarketing, on the other hand, has been heavily regulated at the state and federal levels, and the strength of the regulations is increasing. Initially, just the hours and methods of contact were regulated. (25) More recently, new legislation and regulations have made it easier for consumers to completely opt-out of receiving unsolicited telemarketing calls. Many states have passed "asterisk bills," which prohibit unsolicited telephone sales calls to people who have requested that an asterisk be placed next to their name in the telephone directory, or have required that telemarketers honor do-not-call lists. (26) The most significant impact has come from the national Do Not Call registry imposed by the FTC in 2003. Sixty-two million phone numbers were signed up just one year later, about 60% of respondents to a survey. (27)

      Commercial advertising both to fax machines and using text messaging to mobile phones has been banned. (28) Notably, both methods of advertising cost the receivers money. There were significant complaints about unsolicited fax messages in the 1980s, especially since faxes consumed receivers' toner and paper, and tied up their fax machines. (29) Unsolicited fax advertising was banned by the Telephone Consumer Protection Act of 1991 ("TCPA"). (30) Meanwhile, phone companies in the United States usually charge a per message fee for sending and receiving text messages. (31) The FCC prohibited the sending of unsolicited commercial messages to mobile phones in 2004 as part of the implementation of the CAN-SPAM act. (32)

      Telemarketing to wireless phones has become controversial, and it too incurs a cost for receivers. (33) While not illegal, it has been limited by a combination of self-restraint by...