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Complementarities in Consumption and the Consumer Demand for Advertising

Complementarities in Consumption and the Consumer Demand for Advertising

June 24,2015Working Paper No. 3288

The standard paradigm in the empirical literature is to treat consumers as passive recipients of advertising, with the level of ad exposure determined by firms’ targeting technology and the intensity of advertising supplied in the market. This paradigm ignores the fact that consumers may actively choose their consumption of advertising. Endogenous consumption of advertising is common. Consumers can easily choose to change channels to avoid TV ads, click away from paid online video ads, or discard direct mail without reading advertised details. Becker and Murphy (1993) recognized this aspect of demand for advertising and argued that advertising should be treated as a good in consumers’ utility functions, thereby effectively creating a role for consumer choice over advertising consumption. They argued that in many cases demand for advertising and demand for products may be linked by complementarities in joint consumption. We leverage access to an unusually rich dataset that links the TV ad consumption behavior of a panel of consumers with their product choice behavior over a long time horizon to measure the co-determination of demand for products and ads. The data suggests an active role for consumer choice of ads, and for complementarities in joint demand. To interpret the patterns in the data, we fit a structural model for both products and advertising consumption that allows for such complementarities. We explain how complementarities are identified. Interpreting the data through the lens of the model enables a precise characterization of the treatment effect of advertising under such endogenous non-compliance, and assessments of the value of targeting advertising. To illustrate the value of the model, we compare advertising, prices and consumer welfare to a series of counterfactual scenarios motivated by the “addressable” future of TV ad-markets in which targeting advertising and prices on the basis of ad-viewing and product purchase behavior is possible. We find that both profits and net consumer welfare may increase, suggesting that it may be possible that both firms and consumers become better off in the new addressable TV environments. We believe our analysis holds implications for interpreting ad-effects in empirical work generally, and for the assessment of ad-effectiveness in many market settings.
 

Keywords
advertising, complementarities, treatment effects, non-compliance, discrete-continuous demand, consumer welfare