Advertising Agency Selection Contest with Partial Reimbursements of Participation Costs

41 Pages Posted: 31 Dec 2010 Last revised: 3 Sep 2011

See all articles by Sharon Horsky

Sharon Horsky

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Dan Horsky

Simon Graduate School of Business, University of Rochester

Robert Zeithammer

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: July 6, 2011

Abstract

We model the contest among full-service advertising agencies as a score auction. The score auction allows the advertiser to select the agency that offers the best combination of creative quality and media cost, and to determine the contract price. To participate in the contest, each agency needs to incur an upfront bid-preparation cost arising from the development of a customized creative. Industry literature often calls for the advertiser to reimburse such costs to all agencies that enter the contest. e show that reimbursing bid-preparation costs in full is never optimal for the advertiser. However, a partial imbursement of the costs can be profitable under two conditions we find to be necessary: First, a sufficiently large difference must exist between the bid-preparation cost of the incumbent agency currently serving the account and that of a competitor agency wishing to replace it. Second, the population of agencies must not contain too many weak agencies that can only deliver a very small profit to the advertiser.

Keywords: advertising agency, contest, auctions with entry, reimbursements, incumbency, score auction

JEL Classification: D44

Suggested Citation

Horsky, Sharon and Horsky, Dan and Zeithammer, Robert, Advertising Agency Selection Contest with Partial Reimbursements of Participation Costs (July 6, 2011). Simon School Working Paper No. FR 11-06, Available at SSRN: https://ssrn.com/abstract=1732722 or http://dx.doi.org/10.2139/ssrn.1732722

Sharon Horsky

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

Dan Horsky

Simon Graduate School of Business, University of Rochester ( email )

Carol Simon Hall 3-210
Rochester, NY 14627
United States
585-275-4483 (Phone)

Robert Zeithammer (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
92
Abstract Views
972
Rank
415,149
PlumX Metrics