Understanding the Role of Adstock in Advertising Decisions
50 Pages Posted: 30 May 2012
Date Written: August 3, 2011
Adstock plays a central role in advertising research. Adstock, or goodwill, is the cumulative value of a brand’s advertising at a given point in time. A critical assumption in many advertising models is that managers take Adstock into account when making their advertising decisions. However, there is little empirical evidence to support this basic premise. Therefore, we develop a multivariate heterogeneous Tobit-II model to determine whether the level and rate of change in a brand’s Adstock influence the timing and/or magnitude of advertising investments. We calibrate the model on a comprehensive data set covering the weekly advertising expenditures of close to 750 brands in 129 CPG categories. We find that advertising timing and magnitude decisions do rely on Adstock levels and changes. The reliance is stronger for larger brands and more frequently advertising brands. We also find that responding to changes in Adstock is associated with a higher advertising elasticity. On the other hand, inertia in advertising decision-making, reflected in a strong reliance on past Adstock levels, is linked with a lower advertising elasticity.
Keywords: econometrics, Bayesian estimation, time series, advertising
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