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Economic Factors Underlying the Unbundling of Advertising Agency Services

Author

Listed:
  • Mohammad Arzaghi
  • Ernst Berndt
  • James Davis
  • Alvin Silk

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.

Suggested Citation

  • Mohammad Arzaghi & Ernst Berndt & James Davis & Alvin Silk, 2009. "Economic Factors Underlying the Unbundling of Advertising Agency Services," Working Papers 09-15, Center for Economic Studies, U.S. Census Bureau.
  • Handle: RePEc:cen:wpaper:09-15
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Maria Alipranti & Evangelos Mitrokostas & Emmanuel Petrakis, 2013. "Comparative versus Informative Advertising in Oligopolistic Markets," Working Papers 1301, University of Crete, Department of Economics.
    3. David S. Evans, 2009. "The Online Advertising Industry: Economics, Evolution, and Privacy," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 37-60, Summer.
    4. 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.
    5. Alipranti, Maria & Mitrokostas, Evangelos & Petrakis, Emmanuel, 2016. "Non-comparative and comparative advertising in oligopolistic markets," DICE Discussion Papers 231, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

    More about this item

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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