98-005
INTERMEDIA SUBSTITUTABILITY IN THE U.S. NATIONAL ADVERTISING MARKET
Alvin J. Silk, Lisa R. Klein, and Ernst R. Berndt
To what extent are the mass media substitutes or complements for one
another as modes of communication for national advertisers? How
price-sensitive is aggregate demand by national advertisers for time and
space in the major categories of mass media? While the analysis of
intermedia price sensitivity and substitutability is central to
understanding the contemporary structure and future evolution of the
advertising industry, empirical evidence bearing on these questions is in
extremely short supply. This paper reports a comprehensive econometric
study undertaken to extend the stock of existing knowledge in this area.
We formulate a translog model of market demand for national advertising in
each of eight classes of media and employ three stage least squares to
estimate its parameters using a time series of annual observations for the
1960-1994 period. Own and cross price elasticities and elasticities of
substitution are then estimated for the set of media investigated.
Our results indicate that aggregate demand by national advertisers for
each of the eight major media tends to be price inelastic.
Interdependencies among the market demands for the individual media involve
slightly more substitutive than complementary relations, but both types of
interdependencies are characteristically weak. Whereas direct mail and
newspapers tend to be substitutes for the other mass advertising media,
cross-relations among magazines, outdoor, and the broadcast media (radio
and television, both network and spot) tend to be comprised of fairly
balanced mixtures of substitutive and complementary relations.
The propensity of media to be interrelated as substitutes rather than
complements was hypothesized to be affected by their similarity/dissimilarity with respect to three factors: communications modality,
geographical scope of audience reached, and flexibility of contractual
terms. We find support for the influence of the second and third factors
but not the first.
The pattern of demand conditions uncovered here appears consistent with
the nature of institutional arrangements and media selection practices that
have long prevailed in the United States. Inelastic market demands and
weak cross-media effects are congruent with other evidence that media
planning is conducted as a multistage decision process wherein intermedia
choices are made primarily on strategic and creative grounds followed by
intramedia comparisons where prices are an important consideration. Full
service advertising agencies have historically played a major role in media
selection and reliance on media commissions as the basis for agency
compensation may have served to mitigate intermedia price sensitivity.
Inelastic market demand for the major categories of media advertising is
also congruent with the treatment of national advertisers' demand for media
time and space as being derived from consumers' demand for information
about the goods and services sold by national advertisers. The factors
which theory identifies to be basic determinants of the elasticity of
derived demand would appear to operate so as to generate inelastic market
demand for media advertising although our knowledge of the underlying
parameters is quite primitive.
MKT
68 pages
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