Advertising’s Long-Term Impact on Brand Price Elasticity Across Brands and Categories

59 Pages Posted: 24 May 2016 Last revised: 4 Jul 2016

See all articles by Berk Ataman

Berk Ataman

Koc University

Koen Pauwels

Ozyegin University

Shuba Srinivasan

Boston University - Questrom School of Business

Marc Vanhuele

HEC Paris - Marketing

Date Written: May 22, 2016

Abstract

Advertising often aims at creating and reinforcing brand differentiation, which should translate into reduced price competition. Currently unknown are the boundary conditions for long-term advertising benefits, the route through which advertising effects materialize, and the role of competitive advertising in the category. The authors develop a Hierarchical Dynamic Linear Model that links own and others’ advertising in the category to brand price elasticity directly and indirectly through their impact on own and competitive mindset metrics. The model accommodates dynamic dependencies in mindset metrics, controls for endogeneity in marketing, captures competitive reactions and performance feedback in marketing, and explains cross-sectional variation as a function of brand and category characteristics.

Model estimation on seven years of data for 350 brands in 39 categories shows that both own and all competitive advertising in the category lower price sensitivity for the average brand, both directly and through advertising awareness. The attenuation of price sensitivity is more pronounced for niche brands in complex and more expensive categories, with higher concentration and purchase frequency. A financial simulation based on the estimates shows that while the price elasticity effect is positive and substantial for high-price brands, it hurts the advertising returns for low-price brands.

Keywords: advertising, price elasticity, mindset metrics, long-term effects, dynamic linear models, and empirical generalization

JEL Classification: M31, M37

Suggested Citation

Ataman, Berk and Pauwels, Koen and Srinivasan, Shuba and Vanhuele, Marc, Advertising’s Long-Term Impact on Brand Price Elasticity Across Brands and Categories (May 22, 2016). HEC Paris Research Paper No. MKG-2016-1153. Available at SSRN: https://ssrn.com/abstract=2783096 or http://dx.doi.org/10.2139/ssrn.2783096

Berk Ataman

Koc University ( email )

Rumelifeneri Yolu
34450 Sar?yer
Istanbul, 34450
Turkey

Koen Pauwels

Ozyegin University ( email )

Kusbakisi Cd. No: 2
Altunizade, Uskudar
Istanbul, 34662
Turkey

Shuba Srinivasan (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
6173535978 (Phone)
6173534098 (Fax)

HOME PAGE: http://smgnet.bu.edu/mgmt_new/profiles/SrinivasanShuba.html

Marc Vanhuele

HEC Paris - Marketing ( email )

Paris
France

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