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Economic Factors Underlying the Unbundling of Advertising Agency Services

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Author Info
Mohammad Arzaghi
Ernst Berndt
James Davis
Alvin Silk

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Abstract

This paper addresses a longstanding puzzle involving the unbundling of services that has occurred over more than two decades in the U.S. advertising agency industry: How can the shift from the bundling to the unbundling of services be explained and what accounts for the slow pace of change? Using a cost-based theoretical framework of bundling due to Evans and Salinger (2005, 2008), we develop a simple model of an advertising agency’s decision to unbundle its services as a tradeoff between the fixed cost to the advertiser of establishing and maintaining a relationship with an advertising agency and pecuniary economies of scale available in providing media services. The results from an econometric analysis of cross-sectional and pooled data collected by the U.S. Census Bureau for quinquenial censuses conducted between 1982 and 2002 support the key predictions of the model. We find that advertising agency establishments are more likely to unbundle if they are large and diversified in their service offerings and are less likely to do so with increasing age and greater geographical scope. We also find a strong trend toward unbundling over time, a result that is partially explained by increases in media prices over time.

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File URL: http://www.ces.census.gov/index.php/ces/cespapers?down_key=101864
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Publisher Info
Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 09-15.

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Length: 62 pages
Date of creation: Aug 2009
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Handle: RePEc:cen:wpaper:09-15

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Salinger, Michael A, 1995. "A Graphical Analysis of Bundling," Journal of Business, University of Chicago Press, vol. 68(1), pages 85-98, January. [Downloadable!] (restricted)
  2. Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," Journal of Business, University of Chicago Press, vol. 57(1), pages S211-30, January. [Downloadable!] (restricted)
  3. Kyle Bagwell, 2005. "The Economic Analysis of Advertising," Discussion Papers 0506-01, Columbia University, Department of Economics. [Downloadable!]
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  4. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January. [Downloadable!] (restricted)
  5. Palfrey, Thomas R, 1983. "Bundling Decisions by a Multiproduct Monopolist with Incomplete Information," Econometrica, Econometric Society, vol. 51(2), pages 463-83, March. [Downloadable!] (restricted)
  6. Alvin J. Silk & Ernst R. Berndt, 1994. "Costs, Institutional Mobility Barriers, and Market Structure: Advertising Agencies as Multiproduct Firms," NBER Working Papers 4826, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Bresnahan, Timothy F., 1982. "The oligopoly solution concept is identified," Economics Letters, Elsevier, vol. 10(1-2), pages 87-92. [Downloadable!] (restricted)
  8. Spector, David, 2007. "Bundling, tying, and collusion," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 575-581, June. [Downloadable!] (restricted)
  9. Gilbert, Richard J., 1989. "Mobility barriers and the value of incumbency," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 8, pages 475-535 Elsevier. [Downloadable!] (restricted)
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  10. Steven J. Davis & Kevin M. Murphy, 2000. "A Competitive Perspective on Internet Explorer," American Economic Review, American Economic Association, vol. 90(2), pages 184-187, May. [Downloadable!] (restricted)
  11. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 120-137 National Bureau of Economic Research, Inc. [Downloadable!]
  12. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August. [Downloadable!] (restricted)
  13. Richard J. Gilbert & Michael H. Riordan, 1995. "Regulating Complementary Products: A Comparative Institutional Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 243-256, Summer. [Downloadable!] (restricted)
  14. Varian, Hal R., 1989. "Price discrimination," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 10, pages 597-654 Elsevier. [Downloadable!] (restricted)
  15. Dennis W. Carlton & Michael Waldman, 2002. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 194-220, Summer.
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  16. McAfee, R Preston & McMillan, John & Whinston, Michael D, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 371-83, May. [Downloadable!] (restricted)
  17. Alvin J. Silk & Ernst R. Berndt, 2004. "Holding Company Cost Economies in the Global Advertising and Marketing Services Business," Review of Marketing Science, Berkeley Electronic Press, vol. 2(1). [Downloadable!]
  18. Schmalensee, Richard & Silk, Alvin J & Bojanek, Robert, 1983. "The Impact of Scale and Media Mix on Advertising Agency Costs," Journal of Business, University of Chicago Press, vol. 56(4), pages 453-75, October. [Downloadable!] (restricted)
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  19. Ron S Jarmin & Javier Miranda, 2002. "The Longitudinal Business Database," Working Papers 02-17, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
  20. Eaton, B Curtis & Lemche, S Q, 1991. "The Geometry of Supply, Demand, and Competitive Market Structure with Economies of Scope," American Economic Review, American Economic Association, vol. 81(4), pages 901-11, September. [Downloadable!] (restricted)
  21. Baron, David P & Besanko, David, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(2), pages 237-75, Summer.
  22. Silk, Alvin J & Berndt, Ernst R, 1994. "Costs, Institutional Mobility Barriers, and Market Structure: Advertising Agencies as Multiproduct Firms," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 3(3), pages 437-80, Fall.
  23. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-59, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
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This page was last updated on 2009-12-16.

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