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Article Excerpt
A firm's current advertising is generally associated with an increase in its sales, but this effect is generally short-lived.
--Bagwell (2005, p. 30).
I. INTRODUCTION
It is accepted that advertising can have a short-run effect on sales. However, our understanding of the dynamic effects of advertising is incomplete. For example, a current advertisement for the retailer Land's End can increase immediate sales, but how will the advertisement affect subsequent consumer demand? If there are long-run effects, how will they vary among consumers? In this article, we empirically investigate the dynamic effects of advertising by analyzing a controlled field experiment for a national, durable goods retailer.
Previous empirical studies have been plagued by both endogeneity and measurement issues, as Bagwell (2005) suggests in his review of the literature. Advertising decisions are endogenous, and so effects attributed to variations in advertising expenditure may actually reflect factors that led to the variation in expenditure. The measurement problems reflect the dynamic nature of advertising outcomes. If all the outcomes were immediate, then measurement would be straightforward. However, measuring long-run outcomes requires a control for the potential confound introduced by intervening events.
In the past, empirical studies have addressed these issues by introducing more sophisticated econometric models (Ackerberg 2001,2003). In this article, we overcome endogeneity and measurement problems using an alternative approach. We conduct a field experiment in which we experimentally vary advertising levels for two randomly selected samples of customers. (1) The field setting ensures that consumers engage in actual market transactions and interact with the retailer in a natural manner. The experimental manipulation introduces exogenous variation in advertising, which overcomes endogeneity concerns. Moreover, because customers in each experimental condition are exposed to the same intervening events, we can overcome this confound by comparing demand across the two experimental conditions. This allows us to draw clear causal inferences about the effects of advertising.
There have been many empirical studies of advertising in the consumer packaged goods industry (e.g., Ackerberg 2001,2003; Deighton, Henderson, and Neslin 1994; Tellis 1988) but few studies in durable goods markets. Our study confirms that advertising works differently in a durable goods market. In particular, we provide evidence of two competing effects. First, we show that advertising can affect purchase timing. It is well known that price reductions can cause intertemporal substitution and we show that advertising by a durable good firm may lead to similar effects. An implication of this finding is that advertising may have an initial positive effect on demand followed by a later negative impact. Second, we show that advertising can cause a significant increase in future demand. This second effect is consistent with a long-run goodwill effect and can lead to increases in both short-run and long-run demands.
We show that the magnitude of these effects varies systematically across consumers. Intertemporal substitution is the dominant effect among the firm's "Best" customers who had historically placed a large number of orders with the firm. For these customers, the short-run increase in demand is almost entirely offset by a reduction in future demand. This is a robust result that survives a series of validity checks. We interpret the result as evidence of intertemporal substitution--an effect that has not been previously recognized in the advertising literature.
We also show that advertising causes cross-channel substitution. Customers in this study place their orders through two types of channels: the catalog channel (mail and telephone sales) and the Internet channel. We find that catalog advertising leads to a short-run increase in catalog orders for all customers. However, the impact on Internet orders varies. Among the firm's Best customers, there is an increase in catalog demand and a reduction in Internet demand, while for other customers, catalog advertising leads to increased demand in both channels.
Overall the results indicate that advertising can do little to make a firm's Best customers any better. For these customers, any short-run increases in demand reflect substitution either from different channels or from future demand. In contrast, for other customers, advertising can lead to a long-run shift in the demand function. For these customers, the increase in short-run demand is complemented by higher demand in other channels and higher demand in future periods.
The field experiment was conducted in a retail advertising setting by varying the number of direct mail catalogs sent to customers of a women's clothing retailer. Retail catalogs clearly contain elements that are generally accepted as advertising. One might also conjecture that retail catalogs have other effects that are not typically considered advertising. Is a Land's End catalog the same type of advertising as a Coca-Cola television commercial? We point to two distinctive features of our study. First, there are clear differences between retail and manufacturer advertising. Second, advertising effects may differ by media type. We discuss each of these next.
II. DISTINGUISHING CATALOG ADVERTISING FROM OTHER FORMS OF ADVERTISING
While other articles have analyzed retail advertising (Milyo and Waldfogel 1999), the distinction between manufacturer and retail advertising has received little attention in the economics literature. In contrast, these differences are well documented in the advertising literature. For example, Wells, Moriarity, and Burnett (2006) observe that retail advertising focuses on influencing where customers purchase rather than simply what they purchase. The content of retail advertising typically provides information about multiple items and includes specific details about how to make a purchase. This includes information about shopping hours, acceptable payment methods, and ordering options together with directions to the retailer's Internet or physical stores. On the other hand, manufacturer advertising rarely contains information about multiple products or details about shopping hours or payment methods (though it is not unusual to identify alternative retailers).
The retail catalogs involved in this study describe the retailer's ordering procedures, hours of operation, warranties, and payment methods. The majority of products in the catalog are private label and carry the retailer's brand name, and so the images, copy, and catalog design emphasize the retailer's brand rather than the manufacturers of the various products. The situation is similar to Tiffany & Co.'s powder blue catalogs, which reinforce Tiffany's brand image and provide detailed information about its products. This contrasts with a manufacturer advertisement (e.g., for Sony or Coca-Cola), which emphasizes product characteristics and the manufacturer's brand image.
There are also clear differences across advertising media. Catalog advertising is a form of print media, and a characteristic of this media is that exposure is controlled in part by customers. Print media may also be easily stored, so that customers need not rely on memory to retrieve the advertising content. For example, a customer may be exposed to a magazine advertisement, store the magazine, and later retrieve the advertisement to find a phone number, Web address, or product information. This contrasts with broadcast media, such as radio and television, where advertising is consumed in real time.
Print media is recognized by the advertising industry as the dominant form of advertising. In 2003, a total of $245 billion was spent on advertising in the United States with direct mail ($48 billion) and newspapers ($45 billion) representing the two largest categories. Despite the level of expenditure, direct mail and other forms of print media have gone largely unnoticed in the economics literature. (2) The lack of research is surprising not just because of the economic importance. As we will discuss, direct mail advertising offers important measurement advantages over both manufacturer advertising and other advertising media. In this study, we are able to track the historical and future purchasing behavior of individual customers and form a causal link between the experimental manipulations and the subsequent change in customer behavior.
A. Prior Theoretical Work
Much of the theoretical advertising literature has focused on distinguishing whether advertising serves a persuasive or informative role. Under the persuasive view, advertising enters customers' utilities for different products (Becker and Murphy 1993; Comanor and Wilson 1967, 1974; Kaldor 1950). This leads to an outward shift in the demand function, which has led to claims that advertising may serve an important anticompetitive role. Under the informative view, advertising increases the information that customers have about the available alternatives (Kihlstrom and Riordan 1984; Milgrom and Roberts 1986; Stigler 1961).3 The persuasive and informative views of the role of advertising are both consistent with advertising positively impacting demand in future periods. Yet, it is also possible that the long-run impact of advertising is negative. When making purchasing decisions, customers generally have the alternatives of purchasing competing brands, purchasing from different retailers, or even delaying in the hope of future discounts or product improvements. If advertising makes an immediate purchase of the focal brand more attractive, it implicitly reduces the share of customers who will choose one of these alternatives. The outcome is potentially less demand for competing brands, less demand for competing retailers, and/or less demand in future periods. Of these alternative outcomes, the impact on competing brands (sometimes termed the "combative" role of advertising) has received the most interest. Borden (1942) distinguished between the "primary" and the "selective" effects of advertising: the primary effect describes category-level demand expansion, while the selective effect describes substitution between competing brands. More recently, the distinction between advertising's primary and selective effects has served as a central focus of debate in the tobacco industry (e.g., Roberts and Samuelson 1988; Seldon and Doroodian 1989). The industry has sought to ward off proposed regulation limiting tobacco advertising by arguing that advertising serves primarily a selective role, allowing companies to attract share from their competitors without expanding total industry demand. In contrast, antismoking advocates have argued that tobacco advertising also has an impact on primary demand, contributing to an expansion in total tobacco consumption.
Substitution between brands is analogous to substitution across time. In many product categories, purchasing a competing brand and purchasing in future periods both represent alternatives to making an immediate purchase of the focal brand. Although the possibility of intertemporal substitution has received relatively little attention in the advertising literature, it has received considerable attention in the pricing literature. There is well-documented evidence that price discounts can lead to both brand substitution and intertemporal substitution. As a result, following a price promotion, there is often evidence of a "postpromotion dip" in sales, as customers consume products purchased during the discount period (Blattberg and Neslin 1990, p. 358; Hendel and Nevo 2003). (4) Interestingly, there is also evidence that this intertemporal effect varies...
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