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The Internalization of Advertising Services: An Inter-IndustryAnalysis

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  • Sharon Horsky

    ()
    (Bar-Ilan University, Graduate School of Business Administration,)

  • Steven C. Michael

    (University of Illinois, Department of Business Administration)

  • Alvin J. Silk

    ()
    (Harvard Business School)

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    Abstract

    The common perception appears to be that vertical integration of advertising services is more the exception than the rule in the U.S. advertising industry. This study investigates the extent of such outsourcing and examines inter-industry variation in the use of in-house rather than independent advertising agencies by U.S. advertisers. While the vast majority of large advertisers employ outside agencies, it comes as a surprise to find that when advertisers of all sizes are considered, about half operate some form of in-house agency. Internalization of advertising services is much more widespread than has hitherto been appreciated and varies widely across industries. To explain this variation, we draw on concepts from research on scale economies and transaction costs to develop a set of hypotheses which we test in cross sectional analyses of data covering 69 two digit SIC industries at two points in time, 1991 and 1999. Across industries, we find that the likelihood of internalization of advertising services decreases as the size of advertising outlays increase but increases as advertising intensity and technological intensity increase and is greater for "creative" industries.

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    File URL: http://www.hbs.edu/research/pdf/09-007.pdf
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    Bibliographic Info

    Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 09-007.

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    Length: 43 pages
    Date of creation: Jul 2008
    Date of revision:
    Handle: RePEc:hbs:wpaper:09-007

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    Related research

    Keywords: Advertising Agencies; In-House; Vertical Integration; Make or Buy;

    This paper has been announced in the following NEP Reports:

    References

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    1. Lafontaine, Francine & Slade, Margaret, 2007. "Vertical Integration and Firm Boundaries : The Evidence," The Warwick Economics Research Paper Series (TWERPS) 799, University of Warwick, Department of Economics.
    2. Throsby,David, 2000. "Economics and Culture," Cambridge Books, Cambridge University Press, number 9780521586399, April.
    3. Schmalensee, Richard & Silk, Alvin J & Bojanek, Robert, 1983. "The Impact of Scale and Media Mix on Advertising Agency Costs," The Journal of Business, University of Chicago Press, vol. 56(4), pages 453-75, October.
    4. Thomas N. Hubbard, 2008. "Viewpoint: Empirical research on firms' boundaries," Canadian Journal of Economics, Canadian Economics Association, vol. 41(2), pages 341-359, May.
    5. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
    6. Lajili, Kaouthar & Madunic, Marko & Mahoney, Joseph T., 2007. "Testing Organizational Economics Theories of Vertical Integration," Working Papers 07-0104, University of Illinois at Urbana-Champaign, College of Business.
    7. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
    8. Sharon Horsky, 2006. "The Changing Architecture of Advertising Agencies," Marketing Science, INFORMS, vol. 25(4), pages 367-383, 07-08.
    9. Anderson, Erin, 1988. "Transaction costs as determinants of opportunism in integrated and independent sales forces," Journal of Economic Behavior & Organization, Elsevier, vol. 9(3), pages 247-264, April.
    10. 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.
    11. Macher Jeffrey T & Richman Barak D, 2008. "Transaction Cost Economics: An Assessment of Empirical Research in the Social Sciences," Business and Politics, De Gruyter, vol. 10(1), pages 1-65, May.
    12. Alvin J. Silk & Ernst R. Berndt, 1993. "Scale and Scope Effects on Advertising Agency Costs," Marketing Science, INFORMS, vol. 12(1), pages 53-72.
    13. Caves, Richard E. & Bradburd, Ralph M., 1988. "The empirical determinants of vertical integration," Journal of Economic Behavior & Organization, Elsevier, vol. 9(3), pages 265-279, April.
    14. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
    15. Levy, David T, 1985. "The Transactions Cost Approach to Vertical Integration: An Empirical Examination," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 438-45, August.
    16. Gatignon, Hubert & Anderson, Erin, 1988. "The Multinational Corporation's Degree of Control over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(2), pages 305-36, Fall.
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