dynamics of advertising

DYNAMICS OF RETAIL ADVERTISING: EVIDENCE FROM A FIELD EXPERIMENT DUNCAN SIMESTER, YU (JEFFREY) HU, ERIK BRYNJOLFSSON and ERIC T. ANDERSON * We use a controlled field experiment to investigate the dynamic effects of retail adv ertisin g. The expe riment al des ign ove rcomes limitation s hin deri ng pre vious inv esti gat ions of thi s issue. Our stu dy uncovers dyn ami c adv erti sing eff ects tha t have not been considered in previous literature. We find that current advertising does affect future sales, but surprisingly, the effect is not always positive; for the firm’s best customers, the long-run outcome may be negative. This finding reflects two compet ing eff ects: brand swit chi ng and int ert emp oral sub stit uti on. We als o find ev idence of cros s- ch anne l subs ti tution , wi th the firm’ s be st cust omers swit chi ng demand to the orderin g cha nne l tha t cor resp ond s to the adv erti sing. (JEL L2, L81, M3) A firm’s current advertising is generally associat ed wi th an increase in its sales, but this ef fect 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 under- standing of the dynamic effects of advertising is incomplete. For example, a current adver- ti seme nt for the re ta il er La nd’s End can increase immedi ate sales, but how wi ll the advert ise ment aff ect subs eque nt cons umer demand? If there are long-run ef fects, how will they vary among consumers? In this arti cl e, we empirically investigate the dynamic effects of advert ising by anal yz ing a cont rol led field exper iment for a nati onal, dur able goo ds retailer. Previous empi rical st udie s have been plagued by both endo geneit y and mea sure- me nt iss ues , as Bagwel l (2005) suggests in his review of the literature. Advertising deci- si ons are end ogenous, and so ef fect s attribu ted to variations in advertising expenditure may act uall y refle ct fac tors that led to the var iat ion in expenditure. The measuremen t prob lems reflect the dynamic nature of advertising outcomes. If all the out comes were immedi ate, then measurement would be straightforward. Ho wever, me as uring long-run outcomes requires a control for the potential confound introduced by intervening events. In the pas t, empiri cal studie s have addressed these issu es by int rodu cing mor e sophisticated econometric models (Ackerberg 2001, 200 3). In this article, we ove rcome endo- geneity and measurement problems using an *We thank seminar participants at Georgia Institute of Technology, MIT, Northwestern University, Purdue Uni vers ity, Uni versit y of Connect icut , Univ ersi ty of Mar yla nd, University of Penn sylvania, Uni ver sity of Southern California, 200 4 Workshop on Informatio n Sys- tem and Economi cs, 2005 Symposium on Ele ctr oni c Com- merce Research, 2005 Fifth Annual INFORMS Revenue Manage ment and Pric ing Conf erence, 200 6 Economic Sci- ence Ass ocia tion Nor th Ame rica n Mee ting , and 2006 Nation al Bureau of Economic Resear ch Industria l Orga- nizatio n Winter Meetin g. Generous fund ing was provided by MIT Center for Digital Business. Simester: NTU Professor of Management Science, Sloan School of Manag ement, Massachusetts Institu te of Tec hnology, Cambridge, MA 021 42. Phon e 1-617- 258-0 679, Fax 617-2 58-75 97, E-mai l simeste [email protected] du Hu: Assista nt Professo r, Krannert School of Manag e- ment, Purdue University, West Lafayette, IN 47907. Phon e 1-765- 494-7 907 , Fax 765-494-9658 , E-mail [email protected] Brynjolfsson: Schussel Family Professor and Director of MIT Centerfor Digital Busi ness, Sloa n Scho ol of Man - age ment, Mas sac huse tts Inst itute of Tec hnol ogy, Cambrid ge, MA 02142. Phone 1-617-253 -431 9, Fax 617-258-7579, E-mail [email protected] Anderson: Hartmarx Resear ch Associat e Profess or of Mar- ket ing, Kel logg School of Man age ment, Nor thwestern University,Evanston,IL60208.Phone1-847-467-6482, Fax 847- 491- 2498, E-ma il eric-a nderson@kellogg. northwestern.edu ABBREVIATION RFM: Recency , Frequency, and Monetary Value Economic Inquiry doi:10.1111/j.1465-7295.2008.00161.x (ISSN 0095-2583) Online Early publication July 9, 2008 Vol. 47, No. 3, July 2009, 482–499 Ó 2008 Western Economic Association International 482

dynamics of advertising

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