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LECTURE 7: OTHER TYPES OF ADVERTISING. AEM 4550: Economics of Advertising Prof. Jura Liaukonyte. Lecture Plan. HW2 Exam 1 Informative View Memory Jamming View Empirical Studies of Advertising Effectiveness Advertising and Media Planning Definitions Costs Upfront Market. $.

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lecture 7 other types of advertising

LECTURE 7:OTHER TYPES OF ADVERTISING

AEM 4550:Economics of AdvertisingProf. Jura Liaukonyte

lecture plan
Lecture Plan
  • HW2
  • Exam 1
  • Informative View
  • Memory Jamming View
  • Empirical Studies of Advertising Effectiveness
  • Advertising and Media Planning
    • Definitions
    • Costs
    • Upfront Market
slide3

$

Demand with high advertising

Profit

Demand with low advertising

MC

Quantity

Model of Advertising as Information

example auto industry
Example: Auto Industry

Interaction between Persuasive and Informative advertising

manufacturers vs dealers
Manufacturers vs Dealers
  • Brand Advertising: advertising geared towards brand positioning and communication of product attributes and brand benefits
  • Price Advertising: advertising that informs consumers about price and availability of a brand

"Manufacturer Advertising and Dealers Association Advertising"

manufacturers vs dealers6
Manufacturers vs Dealers
  • Manufacturers often use brand advertising
    • Ex: “Ford Tough” or “V-8 Engine”
  • Dealers often use price advertising
    • Ex: “$2,000 rebate” or “Labor Day Sales Event”

"Manufacturer Advertising and Dealers Association Advertising"

manufacturers vs dealers7
Manufacturers vs Dealers
  • Manufacturer Brand Advertising (MBA) and Dealers’ Price Advertising (DPA) interact positively
    • This suggests that brand advertising and price advertising may work together when they are sent by different channel members
    • Attribution Theory: when consumers accredit auto dealers’ discount advertisements to addressing competition in the industry, the price advertising increases purchase intent.

"Manufacturer Advertising and Dealers Association Advertising"

manufacturers vs dealers8
Manufacturers vs Dealers
  • Manufacturer Brand Advertising (MBA) and Manufacturer Price Advertising (MPA) interact negatively.
    • This suggests that brand advertising and price advertising do not complement each other when they come from the same channel.
    • Unlike Dealers’ Price Advertising, when manufacturers use price advertising, consumers connect a lower price to a defect in the product.
    • This is consistent with the informative view of advertising because advertising about price makes demand more elastic.

"Manufacturer Advertising and Dealers Association Advertising"

manufacturers vs dealers9
Manufacturers vs Dealers
  • When Dealers advertise about price, it increases consumers’ intent to purchase.
  • When manufacturers advertise about price, it decreases consumers’ intent to purchase.

"Manufacturer Advertising and Dealers Association Advertising"

manufacturers vs dealers10
Manufacturers vs Dealers
  • As a result, brand advertisements by manufacturers and price advertisements by dealers should be coordinated to appear at similar times.

"Manufacturer Advertising and Dealers Association Advertising"

empirical evidence setting
Empirical evidence: Setting
  • In the 1960s, considerable variation existed across US with respect to the legal treatment of advertising in the eyeglass industry
    • Some states prohibited all advertising
    • Some states prohibited price advertising but allowed non-price advertising
    • Some states had no restrictions
  • This variation provides a natural experiment
empirical evidence
Empirical Evidence:
  • Eyeglass prices were substantially higher in states that prohibited all advertising than in states that had no restrictions
  • The association between price advertising and lower prices is striking and directly supports the informative view
other studies
Other Studies
  • Cady (1976) considers the U.S. retail market for prescription drugs in 1970
    • Retail prices are significantly and positively related to advertising restrictions
  • Maurizi and Kelly (1978) compare retail gasoline prices across major cities
    • Both the mean and variance of prices are lower in states where price advertising is allowed
  • Schroeter, Smith and Cox (1987) use survey data for the routine legal service market in 17 U.S. metropolitan areas
    • Evidence that price–cost ratios are lower when area-wide advertising intensity is greater
  • These studies all support the informative view
comparison
Comparison
  • Persuasive/Complementary Model:
    • Higher advertising leads to higher demand for each consumer, which leads to higher prices.
  • Informative Model:
    • Higher levels of advertising leads to more consumers but not a higher demand for each consumer, so prices are not affected by advertising levels.
signaling as information
Signaling as Information
  • For experience goods, advertising can also be used to signal quality.
  • If a company engages in an expensive ad campaign, you might infer that the good is high quality because only high quality firms could afford the campaign.
    • Price is can also be used as a signal of high quality.
signaling as information16
Signaling as Information
  • Nelson, 1970 begins with a simple question:
  • How, exactly, does advertising provide information to consumers?
    • The informative content of advertising is clear, when the advertisement contains direct information as to the existence, location, function or price of a product.
  • But what about all of the advertising that does not contain direct information of this kind? Is it persuasive?
  • Nelson argues rather that such advertising still plays an informative role, although the role is indirect.
signaling as information17
Signaling as Information
  • To develop this argument, Nelson (1970) makes a distinction between search and experience goods.
    • Recall, a search good is one whose quality can be determined prior to purchase (but perhaps after costly search),
    • The quality of an experience good can be evaluated only after consumption occurs.
  • Indirect information contained in advertising is especially important for experience goods.
signaling as information18
Signaling as Information
  • 3 reasons why advertising may provide indirect information about experience goods.
  • Signaling-efficiency effect.
    • The demand expansion that advertising induces is most valuable to efficient firms,
    • By advertising, a firm signals that it is efficient, which implies in turn that it offers good deals.
signaling as information19
Signaling as Information
  • Match-products-to-buyers effect.
    • Consumers may have heterogeneous tastes, and it may be difficult to efficiently match products and buyers.
    • A seemingly uninformative ad can assist in this process, since a firm has the incentive to direct its advertising toward the consumers that value its product the most.
signaling as information20
Signaling as Information
  • Repeat-business effect.
    • Ads may remind consumers of their previous experience with the product, and such recollections are of more value to sellers of high-quality goods.
    • Even new consumers may draw a positive association between advertising and quality, and advertising thus may signal quality.
    • Similar to “Memory Jamming” View
signaling and search products
Signaling and Search Products
  • Ads can provide indirect information here as well.
    • Recall signaling-efficiency effect: even if a search good advertisement contains no direct information, the fact that the good is advertised may suggest that the seller is efficient
    • However, search goods offer greater potential for direct information transmission through advertising
    • I.e., ads for experience qualities is dominantly indirect information and advertising for search qualities is dominantly direct information
evidence of the signaling theory
Evidence of the Signaling Theory
  • Advertising intensity is higher for experience goods
  • The ratio of TV to magazine advertising is significantly higher for experience goods
    • Search goods are especially conducive to the transfer of direct information
  • Advertising intensity is higher for non-durable experience and lower-priced experience goods
    • For major purchases, a consumer relies more on WOM, whereas for more frequent, low-cost purchases, a consumer relies on advertising as a source of indirect information
memory jam
Memory Jam
  • Why do familiar brands such as Coca-Cola and McDonald’s advertise so heavily?
  • With the average American drinking 10 gallons of Coca-Cola each year, it’s hard to believe there is much left for most consumers to learn about what’s inside the can.
  • Advertising might also influence the way consumers encode and recall their consumption experiences.
memory jam25
Memory Jam
  • Psychological studies show that people can quite easily forget the origin of a memory.
    • E.g. the stranger’s face is familiar, the individual cannot remember why.
    • When people don’t directly recall the source of a memory, they use what they know to fill in the gaps.
memory jam experiment
Memory Jam: Experiment
  • Researcher gave participants orange juice spiked with salt and vinegar.
  • Results showed that people who watched advertisements for the juice after the taste test remembered the juice as tasting good.
  • Even though what they actually consumed was designed to taste terrible.
  • Ads changed recollection of the sensory experience of tasting the juice, even in the very short-term.
memory jamming view formalized
Memory Jamming View: Formalized
  • Economic theory of advertising based on limited consumer memory
  • Consumers learn through experience: how much they enjoy consuming a firm’s product
  • Each consumer stores in memory the utility he has received from consuming the product during each past experience
  • At the point of purchase, the consumer recalls the utility of these experiences to memory
memory jamming view formalized28
Memory Jamming View: Formalized
  • The firm can use advertising to change the likelihood that the consumer will remember a favorable consumption experience
  • Consistent with a large literature in the psychology of memory
memory jamming
Memory Jamming
  • Average preschooler sees 642 ads/year on TV
  • Memorable slogans
    • Lucky Charms: They’re magically delicious!
  • Paired with creative cartoons- easily recall figures and mascots
student example
Student Example

Soft Drink Industry

memory jamming32
MEMORY JAMMING
  • Need for the players to advertise heavily
    • Reminds the experience more than what is inside the can
    • Changes the way a consumer remembers an experience
  • Coca-Cola’s main type of advertising
combative advertising
Combative Advertising
  • Combative advertising, a characteristic of mature markets, is defined as advertising that shifts consumer preferences towards the advertising firm, but does not expand the category demand.
    • Not about influencing the consumer preferences, but rather about the supply side and advertising
    • Redistributes consumers among brands. If the real differences between brands are modest, then combative advertising may be excessive
    • Basis of Prisoner's dilemma in advertising
advertising wars
Advertising Wars
  • The prisoner's dilemma applies to advertising
  • All firms advertising tends to equalize the effects
  • Everyone would gain if no one advertised
  • Advertising WarsTwo firms spend millions on TV ads to steal business from each other. Each firm’s ad cancels out the effects of the other, and both firms’ profits fall by the cost of the ads.
cigarette advertising on tv

1964

1970

Cigarette Advertising on TV
  • All US tobacco companies advertised heavily on TV
  • Surgeon General issues official warning
      • Cigarette smoking may be hazardous
  • Cigarette companies fear lawsuits
      • Government may recover healthcare costs
  • Companies strike agreement
      • Carry the warning label and cease TV advertising in exchange for immunity from federal lawsuits.
strategic interaction
Strategic Interaction
  • Players: Reynolds and Philip Morris
  • Strategies: Advertise or Not Advertise
  • Payoffs: Companies’ Profits
  • Strategic Landscape:
    • Each firm earns $50 million from its customers
    • Advertising costs a firm $20 million
    • Advertising captures $30 million from competitor
  • How to represent this game?
what to do
What to Do?

If you are advising Reynolds, what strategy do you recommend?

solving the game
Solving the Game
  • Best reply for Reynolds:
      • If Philip Morris advertises:
      • If Philip Morris does not advertise:
dominance
Dominance
  • A strategy is dominantif it outperforms all other choices no matter what opposing players do
  • Games with dominant strategies are easy to play
    • No need for “what if …” thinking
dominance a technical point
DominanceA Technical Point
  • Strict Dominance:

Advertise is strictly dominant forReynoldsif:

    • Profit (Ad , Ad) > Profit (No , Ad)
    • Profit (Ad , No) > Profit (No , No)
dominance43
Dominance

COMMANDMENT

If you have a dominant strategy, use it.

Expect your opponent to use her dominant strategy if she has one.

prisoner s dilemma44
Prisoner’s Dilemma
  • Both players have a dominant strategy
  • The equilibrium results in lower payoffs for each player

Optimal

Equilibrium

cigarette advertising
Cigarette Advertising
  • After the 1970 agreement:
    • Cigarette advertising decreased by $63 million
    • Industry Profits rose by $91 million
  • Prisoner’s Dilemma
    • An equilibrium is NOT necessarily efficient
    • Players can be forced to accept mutually bad outcomes
    • Bad to be playing a prisoner’s dilemma, but good to make others play
advertising sales relationship
Advertising–Sales Relationship
  • Lambin (1976) uses various sales, quality, price and advertising data
    • 107 individual brands from
    • 16 product classes
    • 8 different Western European countries
  • How changes in the advertising expenditures for one brand may affect the current sales of that brand and rival brands?
  • Evaluate goodwill effects and the rival-brand response that an advertising expenditures may induce
lambin 1976 findings
Lambin (1976) Findings
  • Brand advertising has a significant and positive effect on the brand's current sales and market share
  • Evidence for advertising's goodwill effect
  • The quantitative impact of advertising on (current and future) sales is limited:
    • Sales appear more responsive to price and product-quality selections
  • Firm's sales and market share are negatively related to rival advertising
    • Evidence of what?
advertising goodwill
Advertising Goodwill
  • Clarke (1976) identifies a “data-interval-bias” problem:
    • The use of annual advertising data when the effects of advertising on sales depreciate over a shorter period of time can lead to biased estimates of the depreciation rate.
  • “The duration of cumulative advertising effect on sales is between 3 and 15 months; thus this effect is a short-term (about a year or less) phenomenon.”
  • More recently, several studies offer further evidence that the effect of advertising on sales is often largely depreciated within a year (if not less).
  • Latest studies: Beyond 3 months = miniscule effect.
sales response models

A. Concave-Downward Response Curve

B. S-Shaped Response Function

Sales

Sales

Initial Spending

Little Effect

High Spending

Little Effect

Middle Level

High Effect

Range A

Range B

Range C

Advertising Expenditures

Advertising Expenditures

Sales Response Models

Saturation Point

Threshold

sales response model
Sales Response Model

Saturation Effect

Sales

Adv Expenditures

Threshold Effect

overall advertising impact gerard j tellis
Overall Advertising Impact (Gerard J. Tellis)
  • The average sales-to-advertising elasticity is 0.1
  • Higher for new products than established products
  • For Europe than the United States
  • For durables than nondurables
  • For print than TV
  • Advertising elasticity is also lower in models that use disaggregate data and include advertising carryover, quality, or promotion
determinants of advertising impact demetrios vakratsas
Determinants of Advertising Impact(Demetrios Vakratsas)
  • Advertising impact depends on the product category.
  • Specifically, advertising elasticities are as much as 50% higher for durables as for nondurables.
  • Advertising is more effective for experience than for search products.
advertising impact and competition demetrios vakratsas
Advertising Impact and Competition(Demetrios Vakratsas)
  • Higher competitive intensity (clutter) will result in lower advertising effectiveness.
  • Competitive advertising may reduce elasticities by as much as 50%.
advertising reference price dhruv grewal and larry d compeau
Advertising Reference Price(Dhruv Grewal and Larry D. Compeau)
  • The presence of an advertised reference in a price offer enhances perceptions of value
  • Lowers their intention to search for a lower price.
advertising impact duration robert p leone
Advertising Impact Duration(Robert P. Leone)
  • The average advertising duration interval on sales is brief—typically between six and nine months.
tv advertising effect
TV Advertising Effect
  • The average TV advertising to sales elasticity is 0.11 for established consumer products.
  • It is higher for tests after 1995 than those before.
  • There is a high variability in effects around these average elasticities. Some tests had elasticities over 0.5 and others were below -0.05.
advertising and business cycles
Advertising and Business Cycles
  • Advertising is more sensitive to business-cycle fluctuations than the economy.
  • Average co-movement elasticity is1.4.
    • Hence, a 1% increase in the cyclical component of GDP translates, on average, into a 1.4% increase in the cyclical component of the demand for advertising.
    • The extent of this sensitivity varies systematically across countries.
  • When companies tie advertising spending too tightly to business cycles, they experience higher losses:
    • A lower long-term growth of the advertising industry
    • A higher private-label share
    • Lower stock prices
empirical studies
Empirical Studies
  • A firm's current advertising is associated with an increase in its sales, but this effect is usually short lived.
  • Advertising is often combative in nature.
    • An increase in advertising by one firm may reduce the sales of rival firms, and rivals may then react with a reciprocal increase in their own advertising efforts.
  • The overall effect of advertising on primary demand is difficult to determine and appears to vary across industries.
firm specific factors
Firm Specific Factors
  • When assessing the goodwill impact of advertising, it is important that firm-specific factors not be omitted.
  • Recall Nelson’s theory:
    • It may be that advertising affects initial sales but that long-term sales are driven by firm-specific factors, like product quality.
  • Given that higher-quality firms may advertise more, the effects of advertising on future sales may be overstated in an empirical analysis that omits product quality.
  • Kwoka (1993) examines the determinants of model sales in the U.S. auto industry, finding that the effect of advertising is short-lived while product styling has a much longer impact.
advertising and entry
Advertising and Entry
  • Advertising as a response of incumbent firms to entry:
    • Alemson's (1970) studies Australian cigarette industry: new entrants advertise to gain market share and induce increased advertising by incumbents, who seek to maintain market share.
    • Thomas (1999) studies the ready-to-eat cereal industry and reports that incumbent firms often respond to entry with advertising, in order to limit the sales of new entrants.
    • Cubbin and Domberger (1988) examine 42 consumer-goods industries and report evidence that dominant incumbent firms in slow-growth markets often respond to entry with an increase in advertising.
advertising and industry demand
Advertising and Industry Demand
  • Empirical studies suggest that advertising may increase primary demand in some industries but not others.
    • Positive relationships between industry advertising and sales:
        • UK cigarette industry
        • U.S. cigarette industry
        • U.S. orange market
        • U.S. auto industry
    • No effect:
      • U.S. beer market
      • UK instant-coffee market
advertising and brand loyalty
Advertising and Brand Loyalty
  • No clear consensus.
  • The studies do not provide strong evidence that advertising consistently increases brand loyalty or stabilizes market shares.
brand loyalty
Brand Loyalty
  • Recall Persuasive view:
    • The direct effect of advertising is that brand loyalty is created and the demand for the advertised product becomes less elastic.
  • Lack of high detail data – need exposure and brand-purchase data as well as the advertising and pricing behaviors of rival firms.
  • Partly remedied by advent of supermarket scanner data.
  • 2 ways to test for brand loyalty:
    • Estimate demand functions for individual brands, in order to see if consumers exhibit more “inertia” in highly advertised markets.
      • See if the estimated price elasticities are lower in magnitude in product groups with high advertising intensity.
    • Infer the extent of brand loyalty, by further examining the relationship between advertising and market-share stability.
media selection
Media Selection
  • Coverage is the theoretical maximum number of consumers in the retailer’s target market that can be reached by a medium and not the number actually reached.
  • Reach is the actual total number of target customers who come in contact with an advertising message.
  • Cumulative Reach is the reach that is achieved over a period of time.
media selection68
Media Selection
  • Frequency is the average number of times each person who is reached is exposed to an advertisement during a given time period.
when high frequency is used
When High Frequency Is Used
  • A new brand
  • A smaller, less known brand
  • A low level of brand loyalty
  • Relatively short purchase and use cycle
  • With less involved (motivated and capable) target audiences
  • With a great deal of clutter to break through
media selection70
Media Selection
  • Cost Per Thousand Method (CPM) is a technique used to evaluate advertisements in different media based on cost.
    • The cost per thousand is the cost of the advertisement divided by the number of people viewing it, which is then multiplied by 1,000.
media selection71
Media Selection
  • Cost Per Thousand – Target Market (CPM-TM) Is the cost of the advertisement divided by the number of people in the target market viewing it, which is then multiplied by 1,000.
  • Impact refers to how strong an impression an advertisement makes and how well it ultimately leads to a purchase.
slide72
CPMs
  • Cost measured per thousand impressions (CPM)‏
    • Broadcast TV: $10 CPM for 30 second impr
      • Superbowl 30 second spot: $25-40 CPM
    • Around 1 cent per 30 sec impression; 2 cents for 1 minute; 20 cents for 10 minutes
    • Conclusion: TV network is paid 20 cents an hour of content for your attention
typical cpms
Typical CPMs
  • Outdoor: $1-5 CPM
  • Cable TV: $5-8 CPM
  • Radio: $8 CPM
  • Online
    • Display $5-30 CPM
    • Contextual: $1-$5 CPM
    • Search: $1 to $200 CPM
  • Network/Local TV: $20 CPM
  • Magazine: $10-30 CPM
  • Newspaper: $30-35 CPM
  • Direct Mail: $250 CPM
network tv cpms
Network TV CPMs
  • CSI $19.59
  • Without a Trace $13.83
  • CSI Miami $17.30
  • Desperate Housewives $11.81
  • Everybody Loves Raymond $25.19
gross rating points
Gross Rating Points
  • GRPs = Reach X Frequency.
  • GRPs measure the total of all Rating Points during an advertising campaign.
    • A Rating Point is one percent of the potential audience. For example, if 25 percent of all targeted televisions are tuned a show that contains your commercial, you have 25 Rating Points.
  • If, the next time the show is on the air, 32 percent are tuned in, you have a total of 25 + 32 = 57, and so on through the campaign.
media tactics
Media Tactics
  • Three ways to schedule the same number of GRPs
    • Continuous
    • Flighting
    • Pulsing
selling network television
Selling Network Television

NETWORKS SELL THEIR TIME IN 3 STAGES:

The Upfront Market

The Scatter Market

The Opportunistic Market

television sells spots like airlines sell seats
Television Sells Spots Like Airlines Sell Seats
  • If a flight leaves with empty seats, revenue for the seat is zero.
  • To assure full planes, sell the seats at a price that will sell them out early.
  • Charge last -minute buyers highest price
the upfront market
THE UPFRONT MARKET
  • Annual purchase of commercial time well in advance of the telecast time.
  • Upfront advertisers buy 70% of prime time and 50% of other dayparts. Most buy for one year. Get best price.
  • Biggest national advertisers buy children’s programs, prime time, daytime, news, and late night.
scatter market
SCATTER MARKET
  • Sale of most of the year’s remaining inventory not sold at upfront.
  • Inventory generally tight.
  • Prices usually 50% higher than upfront.
opportunistic market
OPPORTUNISTIC MARKET
  • Last-minute buying of inventory due to:
  • Changes in programming
  • Advertisers don’t want to be on controversial programs
  • Advertiser inability to pay
cancellations and guarantees
Cancellations and Guarantees
  • Most network orders are non-cancelable. If an advertiser cannot or does not want the time, it is the advertiser’s responsibility to sell the time - not the network’s.
  • Networks cancel programs with no notice to the advertiser with the provision that commercials will run in another program that delivers the same audience profile.
ratings guarantees
Ratings Guarantees
  • The cost of network time is based on network guarantees of spot price vs. audiences, computed in cost per thousand.
  • If the ratings projected by the network to the advertiser are not achieved, the network runs the spot in other programs to accumulate sufficient ratings to bring the CPM down to the promised level.
  • The extra spots the advertiser gets are called MAKEGOODS