Economic Factors Underlying the Unbundling of Advertising Agency Services

62 Pages Posted: 2 Oct 2008 Last revised: 13 Sep 2010

See all articles by Mohammad Arzaghi

Mohammad Arzaghi

American University of Sharjah

Ernst R. Berndt

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

James C. Davis

US Census Bureau

Alvin J. Silk

Harvard Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 2008

Abstract

This paper addresses a longstanding puzzle involving the unbundling of services that has occurred over more than two decades in the U.S. advertising agency industry: How can the shift from the bundling to the unbundling of services be explained and what accounts for the slow pace of change? Using a cost-based theoretical framework of bundling due to Evans and Salinger (2005, 2008), we develop a simple model of an advertising agency's decision to unbundle its services as a tradeoff between the fixed cost to the advertiser of establishing and maintaining a relationship with an advertising agency and pecuniary economies of scale available in providing media services. The results from an econometric analysis of cross-sectional and pooled data collected by the U.S. Census Bureau for quinquennial censuses conducted between 1982 and 2002 support the key predictions of the model. We find that advertising agency establishments are more likely to unbundle if they are large and diversified in their service offerings and are less likely to do so with increasing age and greater geographical scope. We also find a strong trend toward unbundling over time, a result that is partially explained by increases in media prices over time.

Suggested Citation

Arzaghi, Mohammad and Berndt, Ernst R. and Davis, James C. and Silk, Alvin J., Economic Factors Underlying the Unbundling of Advertising Agency Services (September 2008). NBER Working Paper No. w14345. Available at SSRN: https://ssrn.com/abstract=1276622

Mohammad Arzaghi (Contact Author)

American University of Sharjah ( email )

P.O. Box 26666
Sharjah, 26666
United Arab Emirates

HOME PAGE: http://www2.aus.edu/facultybios/profile.php?faculty=marzaghi

Ernst R. Berndt

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER)

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James C. Davis

US Census Bureau ( email )

National Bureau of Economic Research
1050 Massachusetts Ave.
Cambridge, MA 02138
United States

Alvin J. Silk

Harvard Business School ( email )

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Morgan 270C
Boston, MA 02163
United States
617-495-6036 (Phone)
617-495-8736 (Fax)

HOME PAGE: http://dor.hbs.edu/fi_redirect.jhtml?facInfo=bio&facEmId=asilk

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