01.02.2017

How ‘Opt-out’ Affects Other Consumers

GOH, Khim-Yong | HUI, Kai Lung | PNG, Ivan P.L.

Advertising and direct marketing can be good or bad: consumers may catch a great deal on airline tickets or the latest model of TV, but on the other hand they compete for consumers’ limited attention and can cause nuisance and inconvenience. Consumers avoid marketing in multiple ways: switching channels, using TiVo, concealing their addresses, using caller ID, and installing spam filters, for instance.

When members of the public take steps to avoid advertising, it has a knock-on effect by imposing “externalities” – consequences experienced by third parties -- on other consumers. These externalities affect the effectiveness of advertising and direct marketing, in terms of both vendor profits (they can’t reach customers who want their products, for example) and consumer welfare (when some consumers opt out of receiving marketing calls, those who don’t opt out may experience more calls, for instance). However, very little research has been done on market externalities, and as a result policy makers and managers lack guidance as to their significance.

Khim-Yong Goh, Kai-Lung Hui, and Ivan P. L. Png investigated the extent of externalities in the context of the US Do Not Call (DNC) registry by examining the exogenous, or external, timing of the enforcement of the registry. The registry was opened for consumer registrations on June 27, 2003, with the first wave of registrations (up to August 31) being enforced on October 1, and later registrations enforced after a processing time of three months.

The study compared the pattern of DNC registrations after the start of enforcement on October 1 as a function of the first wave. After enforcement, telemarketers were not allowed to call the first wave of consumers, so those consumers should have experienced a reduction in telemarketing. What about consumers who had not yet registered; they should not have been affected in any way. However, the researchers found that, after enforcement, consumer DNC registrations increased with the magnitude of the first wave. The team interpreted this relation as an externality from previously registered consumers to unregistered consumers, rather than the effects of individual preference or social influence.

They concluded that consumer DNC registrations had knock-on effects on other consumers. An increase in the first wave of registrations by 1% was associated with a 3.1% increase in subsequent registrations. The effect was stronger in larger and more educationally or racially heterogeneous markets. It could possibly be the result of unregistered consumers being more receptive to telemarketing and telemarketers increasing calls to them. Results suggest that managers should facilitate consumer opt-out, especially in larger and more educationally or racially heterogeneous markets.

They explored possible explanations of the externality and found that the evidence pointed toward the mechanism as being consumer self-selection by their expected benefit from telemarketing offers. The first wave of consumers who registered with the DNC were relatively less receptive to telemarketing offers, so the unregistered consumers were relatively more receptive to telemarketing. Hence, it was profitable for telemarketers to increase their calls to the unregistered consumers. However, the increase in calling prompted some of the previously unregistered consumers to join the DNC.

These findings provide insight and guidance to both managerial practice and public policy. Managers need to appreciate how the yield from marketing varies with consumer response to opt-out facilities and how to manage the responses. To the extent of consumer self-selection by expected benefit, managers should support government initiatives to provide opt-out facilities, and particularly in larger and more educationally or racially heterogeneous markets. Policy-makers need guidance on policies to address externalities among consumers and between vendors and consumers in the marketplace.

HUI, Kai Lung

Senior Associate Dean, School of Business and Management, Deputy Head, Elman Family Professor of Business, Chair Professor, Academic Director, Kellogg-HKUST EMBA Program, Academic Director, HKUST EMBA Program, Academic Director, MScFinTech Program
Information Systems, Business Statistics & Operations Management