Article | Review of Marketing Science | October 2012

The Internalization of Advertising Services: An Inter-Industry Analysis

by Sharon Horsky, Steven C. Michael and Alvin J. Silk

Abstract

This study investigates the extent to which U.S. advertisers use in-house rather than independent advertising agencies and examines inter-industry variation in such internalization. Contrary to the widely held impression that use of an in-house advertising agency is more the exception than the rule, we find that vertical integration of advertising services is much more widespread than has hitherto been appreciated. Drawing on concepts from research on scale economies and transaction costs, we develop a set of hypotheses about differences in the expected depth of internalization across industries. We test these hypotheses in cross-sectional analyses of data covering 69 two-digit SIC industries at two points in time, 1991 and 1999. In both years, approximately half of advertisers of all sizes operated an in-house agency. Across industries, we find that the likelihood of internalization of at least some advertising services decreases as the size of advertising outlays increase but increase as advertising intensity and technological intensity increase, and is greater for "creative" industries.

Keywords: Advertisers; In-house advertising; Inter-industry variation; Internalization; Scale Economies; transaction costs; Vertical Integration; Advertising Costs; Creative Industries; Marketing Strategy; Advertising Industry; Europe; North and Central America;

Citation:

Horsky, Sharon, Steven C. Michael, and Alvin J. Silk. "The Internalization of Advertising Services: An Inter-Industry Analysis." Review of Marketing Science 10, no. 2 (October 2012).