Abstract

http://ssrn.com/abstract=965468
 
 

References (58)



 
 

Citations (8)



 


 



The Impact of Advertising on Consumer Price Sensitivity in Experience Goods Markets


Tulin Erdem


New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Marketing

Michael P. Keane


Arizona State University (ASU) - Economics Department; University of Technology, Sydney (Visiting July 2006-Present)

Baohong Sun


Carnegie Mellon University - David A. Tepper School of Business

November 2006


Abstract:     
In this paper we use Nielsen scanner panel data on four categories of consumer goods to examine how TV advertising and other marketing activities affect the demand curve facing a brand. Advertising can affect consumer demand in many different ways. Becker and Murphy (1993) have argued that the "presumptive case" should be that advertising works by raising marginal consumers' willingness to pay for a brand. This has the effect of flattening the demand curve, thus increasing the equilibrium price elasticity of demand and the lowering the equilibrium price. Thus, "advertising is profitable not because it lowers the elasticity of demand for the advertised good, but because it raises the level of demand." Our empirical results support this conjecture on how advertising shifts the demand curve for 17 of the 18 brands we examine. There have been many prior studies of how advertising affects two equilibrium quantities: the price elasticity of demand and/or the price level. Our work is differentiated from previous work primarily by our focus on how advertising shifts demand curves as a whole. As Becker and Murphy pointed out, a focus on equilibrium prices or elasticities alone can be quite misleading. Indeed, in many instances, the observation that advertising causes prices to fall and/or demand elasticities to increase, has misled authors into concluding that consumer "price sensitivity" must have increased, meaning the number of consumers' willing to pay any particular price for a brand was reduced - perhaps because advertising makes consumers more aware of substitutes. But, in fact, a decrease in the equilibrium price is perfectly consistent with a scenario where advertising actually raises each individual consumer's willingness to pay for a brand. Thus, we argue that to understand how advertising affects consumer price sensitivity one needs to estimate how it shifts the whole distribution of willingness to pay in the population. This means estimating how it shifts the shape of the demand curve as a whole, which in turn means estimating a complete demand system for all brands in a category - as we do here. We estimate demand systems for toothpaste, toothbrushes, detergent and ketchup. Across these categories, we find one important exception to conjecture that advertising should primarily increase the willingness to pay of marginal consumers. The exception is the case of Heinz ketchup. Heinz advertising has a greater positive effect on the WTP of infra-marginal consumers. This is not surprising, because Heinz advertising focuses on differentiating the brand on the "thickness" dimension. This is a horizontal dimension that may be highly valued by some consumers and not others. The consumers who most value this dimension have the highest WTP for Heinz, and, by focusing on this dimension; Heinz advertising raises the WTP of these inframarginal consumers further. In such a case, advertising is profitable because it reduces the market share loss that the brand would suffer from any given price increase. In contrast, in the other categories we examine, advertising tends to focus more on vertical attributes.

Number of Pages in PDF File: 49

Keywords: Advertising, Consumer Price Sensitivity, Brand Choice

working papers series


Download This Paper

Date posted: February 27, 2007  

Suggested Citation

Erdem, Tulin and Keane, Michael P. and Sun, Baohong, The Impact of Advertising on Consumer Price Sensitivity in Experience Goods Markets (November 2006). Available at SSRN: http://ssrn.com/abstract=965468 or http://dx.doi.org/10.2139/ssrn.965468

Contact Information

Tulin Erdem (Contact Author)
New York University (NYU) - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
New York University (NYU) - Department of Marketing ( email )
Henry Kaufman Ctr
44 W 4 St.
New York, NY
United States
Michael P. Keane
Arizona State University (ASU) - Economics Department ( email )
Tempe, AZ 85287-3806
United States
University of Technology, Sydney (Visiting July 2006-Present)
PO Box 123 Broadway
NSW 2007
Australia
480-965-1053 (Phone)
480-965-0748 (Fax)
Baohong Sun
Carnegie Mellon University - David A. Tepper School of Business ( email )
5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-6903 (Phone)
412-268-7357 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 4,437
Downloads: 615
Download Rank: 21,879
References:  58
Citations:  8

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo8 in 0.391 seconds