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Choice Set Heterogeneity and the Role of Advertising: An Analysis with Micro and Macro Data

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Author Info

  • Draganska, Michaela

    (Stanford University)

  • Klapper, Daniel

    (Goethe University)

Abstract

We show how to use micro-level survey data from a tracking study on brand awareness in conjunction with data on sales and advertising expenditures to improve the specification, estimation, and interpretation of aggregate discrete choice models of demand. In a departure from the commonly made full information assumption, we incorporate limited information in the form of choice sets to reflect the fact that consumers may not be aware of all available brands at purchase time. We find that both the estimated brand constants and the price coefficient are biased downward when consumer heterogeneity in choice sets is ignored. These biased estimates lead to costly mistakes in firms' price setting. In addition, the tracking data allow us to identify separately two processes by which advertising influences market shares. We find that advertising has a direct effect on brand awareness (inclusion in choice set) in addition to its effect on consumer preferences (increase in utility). This improved understanding of how advertising works enhances our ability to make policy recommendations.

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Bibliographic Info

Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 2063.

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Date of creation: Sep 2010
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Handle: RePEc:ecl:stabus:2063

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Phone: (650) 723-2146
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Web page: http://gsbapps.stanford.edu/researchpapers/
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Cited by:
  1. Christopher Jeffords, 2011. "Preference-Directed Regulation When Ethical Environmental Policy Choices Are Formed With Limited Information," Working Papers 01, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  2. Gordon, Brett R. & Hartmann, Wesley R., 2011. "Advertising Effects in Presidential Elections," Research Papers 2080, Stanford University, Graduate School of Business.
  3. Michael Cohen & Rui Huang & Chen Zhu, 2012. "The Use of Voluntary Marketing Initiatives to Improve the Nutritional Profile of Kids Cereals," Working Papers 11, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  4. Alicia Barroso & Gerard Llobet, 2011. "Advertising And Consumer Awareness Of New, Differentiated Products," Working Papers wp2011_1104, CEMFI.

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