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18 2019 12:45 - 14:00
Meeting Room 4-E4-SR03, Via Roentgen 1, 4th floor

Scale Economies in Television Advertising:The US Television Service Market


Pradeep K. Chintagunta Booth School of Business, University of Chicago


ABSTRACT

The unit cost of television advertising is generally lower for nationally aired ads than locally airedone; this represents a form of economies of scale. We examine such scale economies in advertisingin the context of the US television service market where national (i.e., satellite operators) andlocal businesses (i.e., cable operators) compete. Using data on US households’ choices of cable,satellite and terrestrial services and operators’ advertising decisions between 2004 and 2010, wepresent several empirical findings. First, we identify a statistically significant effect of televisionadvertising on households’ choices (with elasticities ranging from .060 to .134) by leveraging aversion of the “border strategy” to address the endogeneity of advertising. Second, we quantifythe extent to which advertising scale economies reduced the cost of advertising for satelliteoperators, the national players. This suggests that satellite operators would have spent 18-19% more to deliver the same level of ads without the cost benefit of the national advertisingchannel. Third, by exploiting a “budget shock” during the Great Recession, we show thatadvertising scale economies incentivize national businesses to be more engaged in advertisingat the national level, which makes the distribution of ad delivery across geographic marketsless concentrated. We conclude the paper with a general discussion of our findings from theperspective of technology and the changing landscape in the television advertising market.

 

Keywords:Television advertising; Advertising scale economies; Cost advantage; National vs.local; Television service market