Products vs. Advertising: Media Competition and the Relative Source of Firm Profits

38 Pages Posted: 16 Mar 2003

See all articles by David Godes

David Godes

University of Maryland

Elie Ofek

Harvard Business School - Marketing Unit

Miklos Sarvary

INSEAD - Marketing

Date Written: February 2003

Abstract

In this paper, we ask when will a firm earn more profits from selling the attention of its customers to advertisers than from selling the underlying product itself. In other words, when will a firm become an advertising "medium"? We investigate this decision as a function of the intensity and nature of competition. We show that regardless of inherent product value to customers, when the firm faces high within-industry competition it will always earn more profits from the product market. Thus, firms cannot "advertise their way out" of intense competition. However, for products of moderate inherent value, we find that the product model is more attractive when competition is at either extreme (very high or low) but the advertising model is more attractive when competition is in the middle range. This results in an inverse-U pattern for relative source of profits as a function of within-industry competition. We also look at the level of competition between-media and identify conditions for firm profits in one industry to increase as result of heightened competition with another industry. Moreover, we showed that as two media are more substitutable (hence competing more head-to-head for advertising dollars) their source of profits will diverge. In addition, the paper considers the impact of the disutility created by advertising for the product consumer. Interestingly, we find that low levels of consumer disutility may actually increase the proportion of profits from advertising as compared to products.

Keywords: Media, circulation industries, business model selection, competitive strategy, game theory

Suggested Citation

Godes, David and Ofek, Elie and Sarvary, Miklos, Products vs. Advertising: Media Competition and the Relative Source of Firm Profits (February 2003). HBS Marketing Research Paper No. 03-03. Available at SSRN: https://ssrn.com/abstract=386561 or http://dx.doi.org/10.2139/ssrn.386561

David Godes (Contact Author)

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Elie Ofek

Harvard Business School - Marketing Unit ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-6301 (Phone)
617-496-5853 (Fax)

Miklos Sarvary

INSEAD - Marketing ( email )

Boulevard de Constance
Fontainebleau, 77305
France
(33) (0)1 60 72 40 0 (Phone)
(33) (0)1 60 74 55 00 (Fax)

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