This study models advertising content as a noisy signal on product attributes. Contrary to previous empirical studies that modeled advertising only as part of the consumer’s utility function, we formulate advertising also as an element in her information set. This approach yields the following implications. First, in some cases, exposure to advertising decreases the consumer’s tendency to purchase the promoted product. Second, exposure to advertising improves the matching of consumers and products. These implications enable the researcher to distinguish between the effect of advertising on utility and its effect through the information set using individual-level data on both consumption and advertising exposures. Using a dataset that was designed and created to test this model and its implication, we show that the theory is supported empirically. The structural estimates imply that an exposure to a single advertisement decreases the consumer’s probability of not choosing her best alternative by at least 16%.
STRAT
30 pages
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