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The Changing Architecture of Advertising Agencies

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  • Sharon Horsky

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

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.

Suggested Citation

  • Sharon Horsky, 2006. "The Changing Architecture of Advertising Agencies," Marketing Science, INFORMS, vol. 25(4), pages 367-383, 07-08.
    • Handle: RePEc:inm:ormksc:v:25:y:2006:i:4:p:367-383
    DOI: 10.1287/mksc.1060.0198
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    2. Arzaghi Mohammad & Berndt Ernst R. & Davis James C. & Silk Alvin J., 2012. "The Unbundling of Advertising Agency Services: An Economic Analysis," Review of Marketing Science, De Gruyter, vol. 10(1), pages 1-55, December.
    3. Birger Wernerfelt & Alvin Silk & Shuyi Yu, 2021. "Internalization of Advertising Services: Testing a Theory of the Firm," Marketing Science, INFORMS, vol. 40(5), pages 946-963, September.
    4. Soberman, David A., 2009. "Marketing agencies, media experts and sales agents: Helping competitive firms improve the effectiveness of marketing," International Journal of Research in Marketing, Elsevier, vol. 26(1), pages 21-33.
    5. 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.
    6. 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.
    7. Alipranti, Maria & Mitrokostas, Evangelos & Petrakis, Emmanuel, 2016. "Non-comparative and comparative advertising in oligopolistic markets," DICE Discussion Papers 231, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    8. Brett R Gordon & Kinshuk Jerath & Zsolt Katona & Sridhar Narayanan & Jiwoong Shin & Kenneth C Wilbur, 2019. "Inefficiencies in Digital Advertising Markets," Papers 1912.09012, arXiv.org, revised Feb 2020.
    9. Abou Nabout, Nadia & Skiera, Bernd & Stepanchuk, Tanja & Gerstmeier, Eva, 2012. "An analysis of the profitability of fee-based compensation plans for search engine marketing," International Journal of Research in Marketing, Elsevier, vol. 29(1), pages 68-80.
    10. Liu, Yunchuan & Tyagi, Rajeev K., 2017. "Outsourcing to convert fixed costs into variable costs: A competitive analysis," International Journal of Research in Marketing, Elsevier, vol. 34(1), pages 252-264.
    11. 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.
    12. Maria Alipranti & Evangelos Mitrokostas & Emmanuel Petrakis, 2013. "Comparative versus Informative Advertising in Oligopolistic Markets," Working Papers 1301, University of Crete, Department of Economics.
    13. Rubik, Andrea, 2021. "Applying Principles of Management Innovation in Advertising Agencies," Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference (2021), Hybrid Conference, Zagreb, Croatia, in: Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference, Hybrid Conference, Zagreb, Croatia, 9-10 September 2021, pages 286-296, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb.
    14. Jenny - Maria Åström & Karim Carroum Sanz & Sofia Lena Hagström & Andreu Safont Bagué & João Pedro Teles Estima, 2017. "David against Goliath - How creative communication helps small advertising agencies survive in a market led by giant agencies," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 10(3), pages 18-46, September.

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