Television Ad-Skipping, Consumption Complementarities and the Consumer Demand for Advertising

66 Pages Posted: 27 Jun 2015 Last revised: 26 Aug 2017

See all articles by Anna Tuchman

Anna Tuchman

Northwestern - Kellogg

Harikesh Nair

Stanford University - Graduate School of Business

Pedro Gardete

Nova School of Business and Economics

Date Written: August 22, 2017

Abstract

Abstract Endogenous consumption of advertising is common. Consumers can choose to change channels to avoid TV ads, click away from paid online video ads, or discard direct mail without reading advertised details. As technological advances give firms improved abilities to target individual consumers through various media, it is becoming increasingly important for models to reflect the endogenous nature of ad consumption and to consider the implications that ad choice has for firms' targeting strategies. With this motivation, we develop an empirical model of consumer demand for advertising in which demand for ads is jointly determined with demand for the advertised products. Building on Becker and Murphy (1993)'s ideas, the model treats advertising as a good over which consumers have utility and obtains demands as the outcome of a joint utility maximization problem. Leveraging new data that links household-level TV ad-viewing with product purchases, we provide empirical evidence that is consistent with the model: ad-skipping is found to be lower when a household has purchased more of the advertised brand, and purchases are higher when more ads have been watched recently, suggesting that advertising and product consumption are jointly determined. Fitting a structural model of joint demand to the data, we evaluate consumer welfare and advertiser profitability in advertising targeting counterfactuals motivated by an “addressable” future of TV. We find that targeting on the predicted ad-skip probability is an attractive strategy, as it indirectly selects consumers that value the product. Reflecting the positive view of advertising in the model, we also find that net consumer welfare may increase in several targeting scenarios. This occurs because under improved targeting, firms shift advertising to those who are likely to value it. At the same time, consumers that do not value the ads end up skipping them, mitigating possible welfare losses. Both forces are relevant to assessing advertising effects in a world with improved targeting and ad-skipping technology.

Keywords: Advertising, ad-skipping, addressable TV, complementarities, treatment effects, non-compliance, discrete-continuous demand, consumer welfare

JEL Classification: M27, D12, L82

Suggested Citation

Tuchman, Anna and Nair, Harikesh and Gardete, Pedro, Television Ad-Skipping, Consumption Complementarities and the Consumer Demand for Advertising (August 22, 2017). Stanford University Graduate School of Business Research Paper No. 15-40. Available at SSRN: https://ssrn.com/abstract=2623227 or http://dx.doi.org/10.2139/ssrn.2623227

Anna Tuchman (Contact Author)

Northwestern - Kellogg ( email )

Kellogg School of Management
2001 Sheridan Rd.
Evanston, IL 60208
United States

Harikesh Nair

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-4256 (Phone)

HOME PAGE: http://faculty-gsb.stanford.edu/nair/index.html

Pedro Gardete

Nova School of Business and Economics ( email )

Rua da Holanda, 1
Carcavelos, Lisbon 2775-405
Portugal

HOME PAGE: http://pedrogardete.com

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