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R. Wittink Source: Marketing Science, Vol. 14, No. 3, Part 2 of 2: Special Issue on Empirical Generalizations in Marketing, (1995), pp. G151-G160 Published by: INFORMS Stable URL: http://www.jstor.org/stable/184157 Accessed: 15/08/2008 12:57
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marketing activities. (2) the use of price advertising leads to lower prices. G151 0732-2399/95/1403/G 151$01.25 Copyright ? 1995. Empirical Generalization) Introduction Advertising. apart from its numerous direct effects. Many studies of the effect of advertising on the price sensitivity of consumers have been conducted.MARKETING SCIENCE Vol. states that advertising for brands leads to (artificial) product differentiation.A. some studies suggest that an increase in advertising leads to an increase in the estimated price sensitivity of consumers. At firstglance the results of these studies appear to be conflicting. We analyze the characteristics previous studies in marketingand generatea set of three empirical of generalizations. Prior studies on the effect of advertising on consumer price sensitivity have found seemingly conflicting results. The first view. as well as competitive marketing strategies. No. expressed by Comanor and Wilson ( 1979). while other studies have found that an increase in advertising leads to a decrease in the price sensitivity of consumers.S. price elasticity is the preferred measure since it is not sensitive to the units of measurement. Part 2 of 2. Pricing Research. EMPIRICAL GENERALIZATIONS ABOUT THE IMPACT OF ADVERTISING ON PRICE SENSITIVITY AND PRICE ANIL KAUL AND DICK R.1Managersand researchers are frequently interested in assessing consumers' sensitivities to price as an input to strategic and tactical decisions about market segmentation. price. These are ( 1 ) an increase in price advertising leads to higher price sensitivity among consumers. Institute for Operations Research and the Management Sciences . thus creating brand loyalty and lowering ' Price sensitivity of consumers is usually measured either by the slope of the demand curve or by the price elasticity of demand. These generalizationshave important implications for managersand researchers.our summary and discussion of empirical results provide directions for future. Of these. also has an effect on the price sensitivity of consumers and on the prices of goods in a market. For researchers. For example. WITTINK Cornell University Consumers'sensitivitiesto pricechangesare an importantinput to strategicand tacticaldecisions. Managersneed to coordinatetheir advertising and pricing decisions to attain maximum profits. It has been argued that price sensitivities depend on factors such as advertising. and (3) an increase in nonprice advertisingleads to lower price sensitivity among consumers. 1995 Printed in U. 14. One could blame the economists who developed two theories that predict opposite effects of advertising on prices and consumers' price sensitivity. 3. (Advertising.
The last column of Table TABLE I Measure of Price Sensitivity# SC SC EL Paper Woodside & Waddle (1975) Prasad and Ring (1976) Lambin (1976) Typc of Study* FE FE EM Type of Product** CND CND Multiple No. (1983) Gatignon (1984) Krishnamurthi& Raj (1985) Shroeter et al.G152 ANIL KAUL AND DICK R. new products. EX = Consumer Level Experiment.. and even strategic business units. P = Proportion of Retailers/Firms Advertising. we identify the type of study.Researchershave studied this relationship in different ways. the number of brands. EL = Price Elasticity. the type of advertising. the type of product. and the type of interaction (result) observed. Price Sensitivity Decreases with Higher Advertising. of exposures. are based on relationships estimated from aggregatedata (e. services.g. put forth by Stigler ( 1961 ) and Nelson ( 1970. The second view. WITTINK sensitivity to price as a factor in brand choices. Nonprice/National Advertising. of Brands One One Multiple Type of Data*** B B B Type of adv. (1987) EM FE EM EM EM CN1D Airlines CNND PS CND CND Mlultiple Multiple One Multiple Multiple Multiple B Consumer level B Product category B B N N N P N N/P Exp. P = Price/Local Advertising. however. $ = Dollar Expenditure. *' D= IN = Price Sensitivity Increaseswith Higher Advertising. consumer nondurables and durables. In a few studies the relationship is examined at the consumer level. the measure of advertising. These studies span a large set of product situations.. In this table. $ H/L P $ $/P EL EL EL EL EL EL DE IN DE IN DE DE/IN Vanhonacker (1989) Popk-owskiLeszczyck & Rao (1939) Bolton (1989) Bemmaor & Mouchoux (I1991) Kanetkar (1992) Boulding et al. Exp. The controversy regardingthe possible relationship between advertising and price sensitivity has spawned many studies in marketing. The resultant market power for the firms could result in higher prices. $ H/L EL EL EL EL EL IN IN IN DE IN/DE * FE = Field Experiment: EN-1 Empirical Model. at the product market level).A P N N Measure of adv. PS = Professional Service. ** CND = Consumer Nondurable. mature products. states that advertisingby providing information about brands can increase the consideration set and lead to higher price sensitivity among consumers. (1994) Mitra & Lynch (1993) EM FE EM EM EX CND CND CND Multiple CND Multiple Multiple Multiple Multiple Multiple Product category B Consumer level SBU Level Consumer level P P P N N P H/L Exp. the measure of price sensitivity. -. 'SC = Slope Coefficient. Higher price sensitivity should result in lower prices charged by the firms. An overview of 18 studies in which the relationship between advertising and price sensitivity is examined in one form or another is provided in Table 1. Many studies. e. 1974).g.AA Result## IN DE DE H/L H/L $ H/L H/L $ H/L Staelin & Winer (1 976) FE FE EM FE EM CND CND CND CNI) One Multiple One MuLltiple B B B B N N N P EL SC EL SC DE IN IN IN Eskin & Barron (1977) Wittink (1977) Morianty (1983) et CGhosh al. AN = *** B .No. " H/L = High/Low. Brand Level Data. employing methods varying from laboratoryand field experimentation to econometric modeling of historical data.
The strengthof the (laboratory) experimental studies is the causal direction in carefully controlled environments (internal validity). lience. Experimental studies occur either in a laboratoryor in a field setting. The majority of advertising done by retailers (local advertising) is of this type. while econometric researcherstend to use price elasticity as the preferredway to measure the impact of advertising on price sensitivity. Background One way to reconcile the apparently conflicting results is by distinguishing different types of advertisingbased upon its content (Popkowski-Leszczyckand Rao 1989. local advertising is price advertising. By empirical generalization. 1994)..e. The first kind of advertising. and we report empirical generalizations on the basis of the results obtained in various marketing studies. It should be clear that field experimental studies offer the best opportunity for both internal and external validity simultaneously. We consider only those cases where at least three studies have provided the same result.THE IMPACT OF ADVERTISING ON PRICE SENSITIVITY AND PRICE G153 1 indicates that in nine studies price sensitivity increases (IN) with higher advertising. A change in consumer price sensitivity is usually measured either by the interaction between price and advertising in a sales response function (e. Our focus is on interactions which are a higher-order phenomenon than association. is primarily geared toward brand positioning and the communication of unique brand characteristics. both kinds of advertising form an important part of any brand's overall advertisinigstrategy. Boulding et al. The studies that we base our generalizations upon can be grouped into two distinct types-experimental studies and association studies. sometimes referredto as "mood" advertising. In this paper we discuss the effect of advertising on consumer price sensitivity and on price. Since most of this advertising contains price information. In recent years local advertising has become as important as national advertising for many product categories. According to Advertising Age (Dec. whether price information is being communicated or not.. the main point of difference between nonprice and price advertising is in the content of advertising. while the strength of the association studies is the generalization of results across a wider context of product categories and environments (external validity).5 billion was spent on national advertising while $55. and the factors that should be kept in mind when the generalizations are interpreted. and in two cases both effects are obtained. The direction of causality is unambiguous in these studies. The approach that we adopt in this paper is to analyze the characteristics and the results of previous studies. We conclude with a summary and suggestions for future research. The second type of advertising is the kind that informs consumers about the price and availability of a brand. Researchers employing experiments tend to focus on the interaction between advertising and price. We also provide a critical perspective on the methods used. 1992) $76. and national advertising is nonprice advertising. We provide explanations for and discuss the relevance of these generalizations.g. in seven studies it decreases (DE) with higher advertising. i. we mean results that hold when replication occurs under very different conditions. Empirical Generalizations We report three empirical generalizations about advertising and its effect on consumer price sensitivity and otl price: . Bass ( 1]994) suggests that empirical generalizations should have some measure of enhanced quantification as opposed to mere associations. we refer to this advertising as price advertising. Thus. 14. To a large extent.6 billion was spent on local advertising in the United States in 1992. Much of the manufacturers' national advertising is of this type (Resnik and Sterni1977). We refer to this kind of advertising as nonprice advertising. does the slope for price change with advertising) or by a change in the estirnated price elasticity of demand.
advertising level. Moriarity (1983). Their measure of advertising is the proportion of attorneys who advertise in a specific market. six studies using different methods. bathroom tissue. These studies consider those products (services) that are not advertised in certain areas due to legal restrictions. (b) Association studies. existing brands are compared more actively. but also different measures of advertising intensity such as advertising spending and the proportion of firms advertising in a market. Bolton ( 1989) estimated a multivariate model relating differences in estimated price elasticity to market characteristicssuch as brand market share. cat litter. The data pertained to four product categories-frozen waffles. the number of brands that consumers consider increases.and eye examinations. from experimental analysis to econometric models. they found that price elasticities increased by 20 percent to 180 percent for various products when advertisingwas increased. (2) The use of price advertising leads to lower prices. These results have been shown to hold whether the study used experimental methods or empirical modeling of household or aggregatedata. Bemmaor and Mouchoux ( 1991 ) conducted a factorial experiment to test the interaction between price advertising and price. inferences are made about the effect of advertising. liquid cleaner. as consumers are exposed to more information.prescriptionmedicines. ( 1987) studied this relationship in the market for legal services. A similar resultis reportedby Woodside and Waddle ( 1975) for the interaction between in-store promotion and price for instant coffee. and price as an attribute increases in importance during the decision-making process. Benham ( 1972) studied the impact of the presence of advertising for eye glasses and eye examinations and concluded that the presence of advertising is associated with lower . WITTINK (1) An increase in price advertising leads to higherprice sensitivity among consumers. Using price cuts of 5 percent and 15 percent across five stores. etc. relative to costs. She found that higher price (retail) advertising leads to higher price elasticity. The advertising message explicitly mentioned price in it. (a) Experimental studies. Popkowski-Leszczyck and Rao (1989) have obtained similar results using aggregate data. found a substantial and significant negative interaction between feature advertising and retail price. By comparing the prices in the areas where advertising is allowed to prices in the areas where advertising is not allowed. Another is that price advertising attracts new consumers who are more price sensitive. They investigatedthe effect of price (local) advertisingon consumers' price elasticity for a consumer nondurable product. The observed higher price sensitivity among consumers could be due to two separate phenomena. liquid bleach. The products in these studies are legal services. and sparkling wine. For example.The productsused in the experiment were regularground coffee. The price elasticities were estimated across markets rather than within a single product class or brand. their price sensitivity increases. They also found that price sensitivity goes up as advertisingincreases. One is that the price sensitivity of existing consumers might be increasing. These studies span not only different product categories and different levels of aggregation. Schroeter et al. Finally. in an experimental study for a frequently bought packaged good. Thus. Marketingstudies have consistently found that when consumers are exposed to advertising which contains price information or to local advertising. eye glasses. disposable diapers. thus leading to an overall increase in the average price sensitivity of consumers of a brand.G154 ANIL KAUL AND DICK R. while controlling for other factors that affect prices. Research studies primarily conducted by applied economists have examined the impact of local advertising on prices in a market. and ketchup. have obtained a result consistent with the idea that price advertising leads to higher price sensitivity. hair lacquer. The finding is that local advertising leads to lower prices. This advertising was measured by the proportion of retailers (weighted by sales volume) that cooperate in local advertising during the study period.
A direct comparison of the price by television advertising interaction term across the two halves of the sample showed that the interaction estimate is smaller for the heavy half. The choice of one outlet from the larger set considered could depend especially on the prices. However. Cady ( 1976) completed a similar study for prescription drugs and found a result consistent with the idea that local advertising leads to lower prices. Prasad and . the price may decrease because of increased competition (due to advertising)among existing firms. implying that the consumers exposed to heavy advertising were less price sensitive.THE IMPACT OF ADVERTISING ON PRICE SENSITIVITY AND PRICE G155 prices. In any event. Also. the optimal price level decreases. ( 1990) document instances in which retailers'beliefs about consumers' behavior diverge from consumers' actual behavior. eyeglasses. An obvious one is that local advertising leads to higher price sensitivity among existing consumers which will result in a lower optimal price level for the firms (Dorfman and Steiner 1954). In addition. advertising would be allowed in some states and not in other states. They found a significant decrease in the absolute value of the firm's price elasticity in the consumer half that was subjected to heavier amounts of advertising. the observed results from these quasi-experimental studies provide strong evidence. if an experiment were to be conducted to test the hypothesis in question. retailers could demand manufacturer discounts with higher sales. If the outcomes of the legislative processes (advertising allowed or not) are not related to prevailing market characteristics(especially price sensitivity). (a) Experimental studies. Thus. we want to point out that in these studies two kinds of marketsare comparedone where advertising is allowed and another where advertising is not allowed. Urbany et al. prescription medicines) it is unlikely that manufacturers would experience lower marginal costs of production in the presence of local advertising. It is interesting to note that the products examined in these studies are not ones where price is expected to be a criticalattributefor consumers. if advertising attracts additional consumers who are more price sensitive than existing customers. Retailersmay reduce pricesbecause they are cognizant of advertised prices and believe consumers will be influenced by price differences. Since the decision to allow advertising in a particulararea rests with the legislature. (3) An increase in nonpriceadvertisingleads to lowerprice sensitivityamong consumers. In an experimental study. For example. However. Prasad and Ring ( 1976) conducted a similar field experiment where the heavy half was exposed to largeramounts of advertisingcompared to the control half. states would be randomly assigned to the two groups in terms of whether advertising occurs or not. the result is clear that the presence of advertising leads to lower prices. Although this is true. Staelin and Winer ( 1976) examined the results of a heavyup nonprice advertising experiment for a frequently purchased grocery product using split cable TV. There are several reasons that can explain the result that advertising leads to a lower price. However. A comparison of prevailing prices across the two groups of states could lead to an unambiguous causal inference. it appears that these results are stronger than those from other association studies. For example. For the applications mentioned here (legal services. the advertising may have alerted consumers to outlets they would not have considered in the absence of advertising. Kwoka ( 1984) and Haas-Wilson ( 1986) while controlling for quality effects studied the eye glasses market and reached the same conclusion that the presence of advertising is associated with lower prices for consumers. it may be sufficient for managers' beliefs to change with advertising. One might argue that the studies which support the notion of price advertising leading to lower prices are merely association studies and thus do not imply causality. Most studies that have included an examination of the impact of nonprice advertising on consumer price sensitivity have found that national advertising decreases price sensitivity (five studies that obtained different results are discussed later).
particularly in product markets in which consumers have to rely on memory to generate alternatives. This mechanism may also explain why consumer-level laboratory experiments show that price elasticities decrease when consumers receive information such as brand names and quality ratings. Only a very high level of advertising might increase the price sensitivity. some studies (Eskin and Barron 1977. any changes in consumer price sensitivity are for existing consumers only. Mitra and Lynch ( 1993 ). ( 1994). Thus. consumers simply pay less attention to prices.G 156 ANIL KAUL AND DICK R. if successful. Boulding et al. (b) Association studies. As no information about the contents of advertising for various firms was available. Krishnamurthi and Raj ( 1985) analyzed the results of another split cable nonprice advertising experiment for a frequently bought consumer good. different methods such as experimentation and econometric modeling. though he finds some nonlinearity in the estimated relationship. ( 1979) in an experimental study. may result in a lower price sensitivity for the brand. they used the previous period's advertising to affect this period's estimate of price elasticity. Lambin ( 1976) examined the price elasticity for 22 heavily advertisedbrands in western Europe and found that the absolute values of price elasticities were (weakly) inversely related to a measure of advertising intensity. using PIMS data. The effect of nonprice advertising will thus be a net result of the differentiatingaspect of advertising which decreases price sensitivity and the reminder effect on consideration . Popkowski-Leszczyc and Rao ( 1989) used bimonthly data on a consumer packaged good. A similar result was also obtained by Vanhonacker (1989). The main argument for nonprice advertising to reduce price sensitivity rests on the fact that nonprice advertising is used for positioning purposes thus making the brand more differentiated which. They also found that increased advertising leads to a significant decrease in responsiveness to brand prices. Using aggregate-leveldata. Advertising expenditures were collected from Broadcasting and Advertising (BAR) reports which represent national advertising. Another interpretation is that when nonprice information is provided. as has been shown by Sawyer et al. Kanetkar et al. studied this relationship at the strategic business unit level. This result has been obtained in studies that have used different types of data. A common factor in these studies is that the set of consumers studied in the experiments remains constant. they assumed that firms having higher than average price advertise only nonprice information while firms with lower than average price would advertise price information. (1994) found that higher nonprice (national) advertising is associated with lower price sensitivity. no generalizations about these factors can be made. ( 1983) examined the sales of breakfastcereals for a diary panel and found that the sales of heavily advertised brands tended to be less price elastic than the sales of less advertised brands. 1992. in an experimental study. For completeness we do briefly discuss these other studies. To allow for causal direction. The advertising intensity measure captured manufacturer advertising that tends to exclude price information. Based on these nine studies we conclude that the results are consistent with the idea that nonprice advertising reduces the price sensitivity of consumers. Though most studies support the notion that non-price advertising reduces price sensitivity. showed that non-price advertising can increase price elasticity by increasing the number of brands considered. Gatignon 1983. and different products. Wittink 1977. Since there are too few studies that study specific moderating factors. By estimating an econometric model he finds that as the advertising share of a brand increases. and Mitra and Lynch 1993) suggest that nonprice advertising can lead to an increase in price sensitivity of consumers under certain circumstances. Ghosh et al. WITTINK Ring do not show how the main price effect varies between the two groups that differ in the amount of advertising exposure. Popkowski-Leszczyc and Rao (1989) and Boulding et al. its price sensitivity decreases.
and the advertised brand may be used to attract store traffic. Only Wittink (1977). we want to mention some related work. Kanetkar et al. High industry advertising levels can also result in increased brand comparisons.THE IMPACT OF ADVERTISING ON PRICE SENSITIVITY AND PRICE G157 sets that increases price sensitivity. given the Behavior Scan data source (Eskin 1985). Therefore. Alternatively. By the same token. In particular. A common thread in these studies of the effect of nonprice advertising on price sensitivity is that the mix of consumers can change with a change in advertising. Though their study does not clearly state the kind of advertising that consumers were exposed to. Steiner (1973) presents arguments and empirical evidence suggesting that manufacturer advertising influences both the manufacturer margin and the retailer margin. manufacturer advertising may increase manufacturer prices and simultaneously decrease retailer margins (see also . a change in the measured price sensitivity can be due to a change in this mix of consumers as well as to a change in individual consumers' price sensitivities. nonprice advertising in those studies may have had only a modestly positive effect on the size of the consideration set of brands. Thus. Advertising is measured by the number of ads that a consumer is exposed to during a time period.Gatignon (1984) also finds advertising to increase price sensitivity. (1993) show that parameter estimates for a nonlinear model applied to linearly aggregated data can be severely biased. it seems reasonable to believe that consumers were exposed to nonprice advertising. it is possible that the estimated interaction in his study is due to such differences in marketing activities across the territories. one way to interpret the results of studies showing a decrease in price sensitivity is that the reminder effect of nonprice advertising is not very strong. Of course. Thus. The competition between retailers on the advertised brand increases. the argument is that manufacturer advertising increases consumer demand for the advertised brand. Therefore. The selling function of retailers is facilitated by this advertising. Eskin and Barron (1977). He found that the estimated price elasticity for the brand was higher in territories with higher advertising. which similarly may result in increased price sensitivity of consumers. Although Eskin and Barron report the change in the slope coefficient for price. Gatignon (1984). and Kanetkaret al. (1992) estimated a brand choice model at the consumer level using scanner panel data and found that higher advertising leads to higher price sensitivity. Since Eskin and Barron (1977) studied new products (and observed the same interaction effect in three of the four newproduct field experiments). Wittink et al. In addition. both variablesbeing measured relative to competitors. (1992) obtained results consistent with perhaps a strong reminder effect. the manufacturer advertising increases the power of the manufacturer relative to the retailer. Especially for a new product (Eskin and Barron 1977) higher advertising may attract additional consumers who are more price sensitive. The magnitude of the bias depends on the nature of heterogeneity in marketing activities within a market. he shows that competitive reactivity can moderate the effect of national advertising on price sensitivity. Advertising spending by one firm can result in a competitive reaction from its competitors. in their case measured by the slope coefficient for price. which results in lower retail margins for that brand. allowing the manufacturer to increase its margin. as in many other econometric analyses. they found that nonprice advertisingresultedin higher price sensitivity. it is easy to show that the estimated price elasticity shows the same directional effect. Wittink (1977) studied a brand in a mature consumer product category. Finally. model misspecification and aggregation are potential threats to the validity of his result. In investigating the airline market. The resultant increase in messages from the firms might redirect consumers' attention to a variable on which the advertisers differ-price. it is quite plausible that due to an increase in the consideration sets of consumers. The products used are various brands of dog food and aluminum foil. he finds that higher competitive reactivity results in a higher price sensitivity for consumers. Conceptually.using aggregate data.
the effects on manufacturer and retailer margins should be substantiated further. On the other hand. household) data.. Of course. This distinction is important because an increase in advertising may lead to an increase in the number of consumers who purchase the brand. both effects may be of interest to a manager or researcher. The third aspect is concerned with the type of consumers that constitute the market. These new consumers may differ in price sensitivity compared with the original set of consumers. Steiner (1993) provides additional arguments to explain the existence of an inverse association between the margins of manufacturers and retailers. if the product market consists of highly price-sensitive consumers. By the same token. these generalizations provide support for both schools of thought regardingthe effect of advertising. Managers should consider these effects when they make decisions about advertising and pricing. Contingencies We identify three considerations that are relevant to the examination of a relationship between advertisingand consumer price sensitivity. Relevance Implications These generalizations clearly state the differential effects of nonprice and price advertising on consumers' price sensitivity. Studies that use aggregate data cannot ordinarily distinguish between changes in estimated price sensitivity due to a change in the consumer mix from changes due to a change in the price sensitivity of existing consumers. it is of interest to know the impact on (individual) consumers.G 158 ANIL KAUL AND DICK R. nonprice advertising can have little impact on these consumers' price responsiveness. WITTINK Farris and Albion 1980). for example. For disaggregate (e. the average retailer margin on toys declined from 49% to 35%. From a research point of view. a comparable focus may be the sensitivity of brand choice to price. Also. . It is straightforwardto argue that price elasticity is the preferred measure. The result may be a reduction in consumers' price sensitivity (reduced competition) across brands in the presence of nonprice advertising and an increase in consumers' price sensitivity (increased competition) across stores for the same brand. The second aspect that has to be considered is the measure of price sensitivity. Future research should concentrate on aspects such as the characteristicsof advertisingthat influence the relativerole of. the average price sensitivity may change because of the new mix of consumers that increased advertising has attracted. For example. Thus. the differentiationand reminder effects of advertising.g. then the "ceiling effect" would suggest that price advertising can only have a limited impact on the price sensitivity of such consumers.Theoretically. the focus is often on the price effect on unit sales or market share. Steiner found that as advertising increased greatly between 1950 and 1970. For managerial decisions the (total) impact on marketplace behavior may be sufficient. The net effect on consumer prices could be positive (Farris and Reibstein 1979). experimental studies that measure the price sensitivity for a constant set of consumers do not suffer from this confound. Steiner (1973) presents correlational evidence that highly advertised toys have lower distribution margins. It is easy to show that coordination will lead to maximum profits for the firm. The empirical results indicate that coordination between advertising and pricing decisions is important. if the market consists of price-insensitive consumers. The firstis that we need to distinguish between the impact that an increase in advertising has on the price sensitivity of current consumers of a brand and the impact that an increase in advertising has on the average sensitivity of a possibly changing set of consumers. With aggregate data.
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