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The Changing Architecture of Advertising Agencies

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  • Sharon Horsky

    ()
    (Arison School of Business, IDC, Herzliya, Israel 46150)

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    Abstract

    In contrast to other marketing activities, advertising is usually outsourced—historically, to an integrated full-service advertising agency that provides both creative and media services. Recently, major changes have occurred, specialized media shops have appeared, and large holding companies with several agencies and a separate media shop have emerged. This paper describes how firms in the current industry structure choose their agents. A theoretical section specifies the firm's decision process in obtaining the creative and media components. Conditions under which one or both could be effectively produced internally are identified. In the prevalent case when these components are outsourced, we evaluate whether they can be more efficiently produced by a bundled full-service agency or by unbundling to separate agents. An empirical section tests the theory implications with cross-sectional data on U.S. firm choices of advertising agents. The bundled full-service agency is still widely used. Firms with large advertising budgets unbundle to take advantage of media discounts obtained by market-making media shops. Internal agencies are used when firms have internal creative abilities, or have low-level requirements in both creative and media. The creative and media agencies within holding companies are found to act independently.

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    File URL: http://dx.doi.org/10.1287/mksc.1060.0198
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 25 (2006)
    Issue (Month): 4 (07-08)
    Pages: 367-383

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    Handle: RePEc:inm:ormksc:v:25:y:2006:i:4:p:367-383

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    Related research

    Keywords: advertising agencies; media shops; outsourcing; unbundling; double marginalization;

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    Cited by:
    1. Maria Alipranti & Evangelos Mitrokostas & Emmanuel Petrakis, 2013. "Comparative versus Informative Advertising in Oligopolistic Markets," Working Papers 1301, University of Crete, Department of Economics.
    2. Mohammad Arzaghi & Ernst R. Berndt & James C. Davis & Alvin J. Silk, 2008. "Economic Factors Underlying the Unbundling of Advertising Agency Services," NBER Working Papers 14345, National Bureau of Economic Research, Inc.
    3. Alvin J. Silk & Charles King III, 2008. "Concentration Levels in the U.S. Advertising and Marketing Services Industry: Myth vs. Reality," Harvard Business School Working Papers 09-044, Harvard Business School.
    4. Sharon Horsky & Steven C. Michael & Alvin J. Silk, 2008. "The Internalization of Advertising Services: An Inter-IndustryAnalysis," Harvard Business School Working Papers 09-007, Harvard Business School.

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