“ADVERTISING’S LONG-TERM IMPACT ON BRAND PRICE ELASTICITY ACROSS BRANDS AND CATEGORIES”
by Assoc. Prof. Berk Ataman
Koç University Faculty of Economics and Administrative Sciences – Marketing
Advertising often aims at creating and reinforcing brand differentiation, which should translate into reduced price competition. 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 Hierarchical Dynamic Linear Model that links advertising to brand price elasticity directly and indirectly through consideration and preference mindset metrics. The model accommodates dynamic dependencies in mindset metrics and explains cross-sectional variation as a function of brand and category characteristics. Model estimation on six and a half years of data for 350 brands in 39 categories shows that advertising decreases price elasticity for the average brand, both directly and indirectly, mainly through consideration. The effect through main brand preference is much smaller. The decrease in price elasticity is more pronounced for less expensive and low-quality brands and in complex and frequently purchased product categories. 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.