Markets for durable goods such as cars, computers, cell phones, and digital cameras are characterized by the continuous turnover of multiple relatively close substitute products. For these goods, advertising becomes crucial in making consumers aware of the existence and characteristics of new products. When a firm decides how much to advertise its new products, it takes into account that this decision will affect its future awareness, making its decision dynamic. For this reason, firms find optimal to concentrate their advertising expenditures early in a product's life cycle, when the novelty and its innovative features might compare favorably with competitors' offerings, and reduce them over time. Understanding how awareness of a product builds over time (denoted as the awareness process) is important because it affects the optimal staging of the advertising expenditures.
The authors propose an empirical model to measure the dynamic effect of advertising on consumers' product awareness and study its evolution over time as a function of the consumer behavior and firm decisions. As an illustration it uses data from the Spanish automobile market.
The results suggest that the dynamic effect of advertising is particularly important for new products, the awareness process of which can be significantly sped up. The authors estimate that this process takes three years on average, but depending on the level of advertising expenditures, it may range from one to six years. This heterogeneity in the length of the awareness process and the different components uncovered by their analysis provide cautionary advice against estimating the effect of advertising on new product sales using models that do not endogenize the awareness process, because they are likely to lead to biased estimates. The authors also show that accounting for both the dynamic effect of advertising on awareness and the competitors’ decisions is crucial in explaining the evolution of product sales over its life cycle. Furthermore, they estimate that, on average, half the effect of advertising on awareness can be attributed to its dynamic component.
Alicia Barroso has been Assistant Professor of Marketing at the Department of Business Administration at Universidad Carlos III de Madrid since 2009. She holds a PhD in Economics from CEMFI and UNED. During her doctoral program, she was visiting scholar at the Economics department at Harvard University, Cambridge.
Her areas of interest are advertising, product variety, and product strategies in new market segments with emphasis on the strategic interactions between firms. Her work has been mainly in the automobile industry.
Gerard Llobet has been Associate Professor of Economics at CEMFI since 2000. He holds a PhD in Economics from the University of Rochester. His research is focused on industrial organization topics. He has worked on areas related to innovation and how intellectual property can be used to provide incentives. He has also contributed in the areas of corporate social responsibility and banking. His work has been published in journals such as Journal of Political Economy, Management Science, Journal of Banking and Finance, and Journal of Economics and Management Strategy.
Journal of Marketing Research, Volume 49, Number 6, December 2012
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