The Impact of Advertising on Consumer Price Sensitivity in Experience Goods Markets

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Journal Article
Quantitative Marketing and Economics, 2008, 6 (2), pp. 139 - 176
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In this paper we use Nielsen scanner panel data on four categories of consumer goods to examine how TV advertising and other marketing activities affect the demand curve facing a brand. Advertising can affect consumer demand in many different ways. Becker and Murphy (Quarterly Journal of Economics 108:941964, 1993) have argued that the presumptive case should be that advertising works by raising marginal consumers willingness to pay for a brand. This has the effect of flattening the demand curve, thus increasing the equilibrium price elasticity of demand and the lowering the equilibrium price. Thus, advertising is profitable not because it lowers the elasticity of demand for the advertised good, but because it raises the level of demand. Our empirical results support this conjecture on how advertising shifts the demand curve for 17 of the 18 brands we examine. There have been many prior studies of how advertising affects two equilibrium quantities: the price elasticity of demand and/or the price level. Our work is differentiated from previous work primarily by our focus on how advertising shifts demand curves as a whole. As Becker and Murphy pointed out, a focus on equilibrium prices or elasticities alone can be quite misleading. Indeed, in many instances, the observation that advertising causes prices to fall and/or demand elasticities to increase, has misled authors into concluding that consumer price sensitivity must have increased, meaning the number of consumers willing to pay any particular price for a brand was reducedperhaps because advertising makes consumers more aware of substitutes.
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