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

Author

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  • 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.

Suggested Citation

  • Draganska, Michaela & Klapper, Daniel, 2010. "Choice Set Heterogeneity and the Role of Advertising: An Analysis with Micro and Macro Data," Research Papers 2063, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:2063
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    File URL: http://gsbapps.stanford.edu/researchpapers/library/RP2063.pdf
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    References listed on IDEAS

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    Cited by:

    1. Brett R. Gordon & Wesley R. Hartmann, 2013. "Advertising Effects in Presidential Elections," Marketing Science, INFORMS, vol. 32(1), pages 19-35, June.
    2. Garrett, Daniel & Gomes, Renato & Maestri, Lucas, 2014. "Competitive Screening under Heterogeneous Information," CEPR Discussion Papers 10036, C.E.P.R. Discussion Papers.
    3. Helmers, Christian & Krishnan, Pramila & Patnam, Manasa, 2015. "Attention and Saliency on the Internet: Evidence from an Online Recommendation System," CEPR Discussion Papers 10939, C.E.P.R. Discussion Papers.
    4. Bruno Wichmann & Minjie Chen & Wiktor Adamowicz, 2016. "Social Networks and Choice Set Formation in Discrete Choice Models," Econometrics, MDPI, Open Access Journal, vol. 4(4), pages 1-26, October.
    5. Christopher Jeffords, 2014. "Preference-directed regulation when ethical environmental policy choices are formed with limited information," Empirical Economics, Springer, vol. 46(2), pages 573-606, March.
    6. Alicia Barroso & Gerard Llobet, 2011. "Advertising and Consumer Awareness of New, Differentiated Products," Working Papers wp2011_1104, CEMFI.
    7. Thomas Blake & Chris Nosko & Steven Tadelis, 2016. "Returns to Consumer Search: Evidence from eBay," NBER Working Papers 22302, National Bureau of Economic Research, Inc.
    8. 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.
    9. Fabio Pinna & Stephan Seiler, 2014. "Consumer Search: Evidence from Path-tracking Data," CEP Discussion Papers dp1296, Centre for Economic Performance, LSE.
    10. Anna Lu, 2017. "Inference of Consumer Consideration Sets," Discussion Papers of DIW Berlin 1681, DIW Berlin, German Institute for Economic Research.
    11. Tiago Pires, 2016. "Costly search and consideration sets in storable goods markets," Quantitative Marketing and Economics (QME), Springer, vol. 14(3), pages 157-193, September.
    12. Crawford, Gregory S. & Griffith, Rachel & Iaria, Alessandro, 2016. "Demand Estimation with Unobserved Choice Set Heterogeneity," CEPR Discussion Papers 11675, C.E.P.R. Discussion Papers.
    13. Pinna, Fabio & Seiler, Stephan, 2014. "Consumer search: evidence from path-tracking data," LSE Research Online Documents on Economics 60447, London School of Economics and Political Science, LSE Library.
    14. repec:kap:mktlet:v:28:y:2017:i:2:d:10.1007_s11002-016-9407-0 is not listed on IDEAS

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