Advertising's Impact on Brand Price Elasticity

Abstract

Managers often count on advertising to create and reinforce brand differentiation, which should, in theory at least, translate into lower price sensitivity for their brands. But to what extent does it do so, what is the route through which this effect of advertising materializes, and what are the boundary conditions? The authors develop a Dynamic Linear Model that links advertising to brand price elasticity directly and indirectly through consideration and main brand preference mindset metrics. Model estimation on six and a half years of data, on average, for 350 brands in 39 categories of fast-moving consumer goods shows that advertising indeed decreases the magnitude of price elasticity. The effect is mainly direct (97.5%) and partly indirect (2.5%), through brand preference. The direct effect shows that advertising predominantly decreases price sensitivity among the consumers who already consider the brand and among the consumers who already prefer it. When converted into incremental revenue impact, monetary gains from this increased pricing power are especially pronounced for expensive brands in complex and frequently purchased categories. The findings thus help managers demonstrate the benefits of advertising in sustaining brand performance.

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

JEL Classification: M3, M31, M37