Division of Research Working Paper Abstract

99-126

RESTRUCTURING IN THE U.S. ADVERTISING MEDIA INDUSTRY

Alvin J. Silk, Lisa R. Klein, and Ernst R. Berndt

This paper examines the implications of evolving technology, shifting regulatory policies, and changing economic conditions for intermedia competition in the market for U.S. national advertising. We begin with a review of theoretical considerations and empirical evidence relating to aggregate demand by national advertisers for time and space in the major media. Consistent with the view that the demand for advertising derives from consumers’ demand for information, aggregate demand for each of the major media tends to be price inelastic. Interdependencies among these market demands involve both substitutive and complementary relations, both of which are weak. These demand conditions appear to reflect in part, the nature of institutional arrangements and media selection practices that have long prevailed in the U.S. advertising market.

Taking patterns of interdependencies among market demands as the relevant measure of intermedia rivalry, we propose a set of hypotheses about how three factors affect the likelihood that market demands by national advertisers in alternative media will be interrelated as substitutes rather than complements: (i) audience addressability, (ii) audience control over attention to advertising, and (iii) flexibility of contractual terms. These hypotheses are tested using estimates of cross elasticities among eight major media reported by Silk, Klein, and Berndt (1997).

Using Porter’s (1985) "five forces" framework, we then consider how the broad array of technological and economic changes now underway in the U.S. media industry may be expected to alter the present structure of intermedia competition. On the demand side, changes in longstanding elements of advertising agency-client relations are affecting media buying practices as are national advertisers’ concerns about the productivity of media expenditures. In terms of existing and potential substitutes, the continuing reliance on price-oriented promotion in any product/service markets; growing utilization of “non-traditional” forms of advertising and promotion; and the development of the Internet and electronic commerce all pose long-term threats to established advertising media. With respect to developments affecting the supply and distribution of media content, the prospects of rising levels of concentration and/or vertical integration might serve to diminish rather than heighten rivalry in media advertising business.

Building on that background, we conclude with a discussion of the emerging position of the Internet as an advertising medium. The nature and time path of its evolution is subject to considerable uncertainty arising from issues relating to the expansion of the Internet’s penetration of households; consumer demand for information; development of pricing policies and measurement capabilities; and its attractiveness to advertisers in different product/service categories. Our analyses of these issues suggest that its long-term impact on intermedia rivalry will be broad and substantial. The Internet is emerging as an adaptive, hybrid medium with respect to the aforementioned factors hypothesized to affect intermedia substitutability, namely, audience addressability, audience control, and contractual flexibility. Possessing such capabilities, it looms as a potential substitute or complement for all of the major categories of existing media and appears capable of serving a wide range of communications objectives for a broad array of advertisers.
JEL Classifications: L82, M37
Keywords: Advertising, Internet

MKT
62 pages