Choice Set Heterogeneity and the Role of Advertising: An Analysis with Micro and Macro Data

Stanford Graduate School of Business Research Paper Series No. 2063

44 Pages Posted: 9 Oct 2010

See all articles by Michaela Draganska

Michaela Draganska

Drexel University

Daniel Klapper

Humboldt University Berlin - School of Business and Economics

Date Written: September 24, 2010

Abstract

We show how to use micro-level survey data from a tracking study on brand awareness in conjunction with data on sales and advertising expenditures to improve the specification, estimation, and interpretation of aggregate discrete choice models of demand. In a departure from the commonly made full information assumption, we incorporate limited information in the form of choice sets to reflect the fact that consumers may not be aware of all available brands at purchase time. We find that both the estimated brand constants and the price coefficient are biased downward when consumer heterogeneity in choice sets is ignored. These biased estimates lead to costly mistakes in firms’ price setting.

In addition, the tracking data allow us to identify separately two processes by which advertising influences market shares. We find that advertising has a direct effect on brand awareness (inclusion in choice set) in addition to its effect on consumer preferences (increase in utility). This improved understanding of how advertising works enhances our ability to make policy recommendations.

Keywords: advertising, advertising impact, demand estimation, econometrics, choice set heterogeneity

Suggested Citation

Draganska, Michaela and Klapper, Daniel, Choice Set Heterogeneity and the Role of Advertising: An Analysis with Micro and Macro Data (September 24, 2010). Stanford Graduate School of Business Research Paper Series No. 2063, Available at SSRN: https://ssrn.com/abstract=1689243 or http://dx.doi.org/10.2139/ssrn.1689243

Michaela Draganska (Contact Author)

Drexel University ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

Daniel Klapper

Humboldt University Berlin - School of Business and Economics ( email )

Spandauer Str.1
Berlin, Berlin 10178
Germany

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