Correcting Audience Externalities in Television Advertising

Posted: 5 Dec 2013

See all articles by Kenneth C. Wilbur

Kenneth C. Wilbur

University of California, San Diego (UCSD) - Rady School of Management

Linli Xu

University of Minnesota - Twin Cities - Carlson School of Management

David Kempe

University of Southern California - Department of Computer Science

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Date Written: December 4, 2013

Abstract

When a television advertisement causes viewers to switch channels, it reduces the audience available to subsequent advertisers. This audience loss is not reflected in the advertisement price, resulting in an audience externality. The present article analyzes the television network's problem of how to select, order, and price advertisements in a break of endogenous length in order to correct audience externalities. It proposes the Audience Value Maximization Algorithm (AVMA), which considers many possible advertisement orderings within a dynamic programming framework with a strategy-proof pricing mechanism. Two data sets are used to estimate heterogeneity in viewer-switching probabilities and advertiser willingness-to-pay parameters in order to evaluate the algorithm's performance. A series of simulations shows that AVMA typically maximizes audience value to advertisers, increases network revenue relative to several alternatives, and runs quickly enough to implement.

Keywords: advertising, advertising avoidance, media, television, pricing, externalities

Suggested Citation

Wilbur, Kenneth C. and Xu, Linli and Kempe, David, Correcting Audience Externalities in Television Advertising (December 4, 2013). Marketing Science, Vol. 32, No. 6, 2013; pp. 892–912; DOI: 10.1287/mksc.2013.0807, Available at SSRN: https://ssrn.com/abstract=2358323

Kenneth C. Wilbur (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

HOME PAGE: http://kennethcwilbur.com

Linli Xu

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 - 19th Avenue South
Minneapolis, MN 55455
United States

David Kempe

University of Southern California - Department of Computer Science ( email )

Los Angeles, CA 90089-0781
United States

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