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The Unfavorable Economics of Measuring the Returns to Advertising

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Listed:
  • Randall A. Lewis
  • Justin M. Rao

Abstract

Twenty-five large field experiments with major U.S. retailers and brokerages, most reaching millions of customers and collectively representing $2.8 million in digital advertising expenditure, reveal that measuring the returns to advertising is difficult. The median confidence interval on return on investment is over 100 percentage points wide. Detailed sales data show that relative to the per capita cost of the advertising, individual-level sales are very volatile; a coefficient of variation of 10 is common. Hence, informative advertising experiments can easily require more than 10 million person-weeks, making experiments costly and potentially infeasible for many firms. Despite these unfavorable economics, randomized control trials represent progress by injecting new, unbiased information into the market. The inference challenges revealed in the field experiments also show that selection bias, due to the targeted nature of advertising, is a crippling concern for widely employed observational methods. JEL Codes: L10, M37, C93.

Suggested Citation

  • Randall A. Lewis & Justin M. Rao, 2015. "The Unfavorable Economics of Measuring the Returns to Advertising," The Quarterly Journal of Economics, Oxford University Press, vol. 130(4), pages 1941-1973.
  • Handle: RePEc:oup:qjecon:v:130:y:2015:i:4:p:1941-1973
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    File URL: http://hdl.handle.net/10.1093/qje/qjv023
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    Citations

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    Cited by:

    1. repec:kap:qmktec:v:15:y:2017:i:3:d:10.1007_s11129-017-9184-y is not listed on IDEAS
    2. Mckenzie,David J. & Mckenzie,David J., 2016. "Can business owners form accurate counterfactuals ? eliciting treatment and control beliefs about their outcomes in the alternative treatment status," Policy Research Working Paper Series 7668, The World Bank.
    3. repec:kap:qmktec:v:13:y:2015:i:2:d:10.1007_s11129-015-9155-0 is not listed on IDEAS
    4. Randall Lewis & Dan Nguyen, 2015. "Display advertising’s competitive spillovers to consumer search," Quantitative Marketing and Economics (QME), Springer, vol. 13(2), pages 93-115, June.
    5. Nick Hanley & Mikolaj Czajkowski, 2016. "What is the Causal Impact of Knowledge on Preferences in Stated Preference Studies?," Discussion Papers in Environment and Development Economics 2016-09, University of St. Andrews, School of Geography and Sustainable Development.
    6. Klein, Tobias, 2018. "Advertising as a reminder: Evidence from the Dutch State Lottery," CEPR Discussion Papers 12948, C.E.P.R. Discussion Papers.
    7. Pierre Dubois & Rachel Griffith & Martin O’Connell, 2018. "The Effects of Banning Advertising in Junk Food Markets," Review of Economic Studies, Oxford University Press, vol. 85(1), pages 396-436.
    8. Liberali, G. & Urban, G.L. & Dellaert, B.G.C. & Tucker, C. & Bart, Y. & Stremersch, S., 2016. "A New Method of Measuring Online Media Advertising Effectiveness: Prospective Meta-Analysis in Marketing," ERIM Report Series Research in Management ERS-2016-007-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    9. Weijia (Daisy) Dai & Michael Luca, 2016. "Effectiveness of Paid Search Advertising: Experimental Evidence," Harvard Business School Working Papers 17-025, Harvard Business School.
    10. repec:nbr:nberch:14009 is not listed on IDEAS
    11. Chen He & Tobias J. Klein, 2018. "Advertising as a Reminder: Evidence from the Dutch State Lottery," CESifo Working Paper Series 7080, CESifo Group Munich.
    12. J. Scott Holladay & Jacob LaRiviere & David M. Novgorodsky & Michael Price, 2016. "Asymmetric Effects of Non-Pecuniary Signals on Search and Purchase Behavior for Energy-Efficient Durable Goods," NBER Working Papers 22939, National Bureau of Economic Research, Inc.
    13. Grundl, Serafin J. & Kim, You Suk, 2017. "Consumer Mistakes and Advertising : The Case of Mortgage Refinancing," Finance and Economics Discussion Series 2017-067, Board of Governors of the Federal Reserve System (U.S.).
    14. repec:eee:jhecon:v:55:y:2017:i:c:p:30-44 is not listed on IDEAS

    More about this item

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments

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