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Publications
Publications
  • September–October 2021
  • Article
  • Marketing Science

Internalization of Advertising Services: Testing a Theory of the Firm

By: Alvin J. Silk, Birger Wernerfelt and Shuyi Yu
  • Format:Print
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Abstract

In 1956, a group of trade associations representing publishers and independent advertising agencies signed a consent decree aimed at ending a set of trade practices that for half a century effectively precluded advertisers from owning and operating in-house agencies. Since then, large firms have internalized more and more of the services formerly performed by external agencies, perhaps as many as half. We use this phenomenon to test a theory of the firm, thereby simultaneously offering an explanation for it. The theory suggests that firms should internalize activities for which their competitive position implies (1) that it is more important for human capital to be firm-specific as opposed to function-specific and (2) that frequent modifications are desirable. It also predicts (3) that these two effects reinforce each other. This is the first paper to report on a test of the specialization hypothesis and we find that it is robustly significant in a cross-sectional dataset covering nine different agency activities in 79 firms. In addition to the cross-sectional test, we informally present some time-series data suggesting that both specialization and frequency have grown over time along with the level of internalization.

Keywords

Internationalization; Specialization; Theory Of The Firm; Advertising Agencies; Advertising; Organizational Structure; Theory

Citation

Silk, Alvin J., Birger Wernerfelt, and Shuyi Yu. "Internalization of Advertising Services: Testing a Theory of the Firm." Marketing Science 40, no. 5 (September–October 2021): 946–963.
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More from the Authors
  • Aggregate Advertising Expenditure in the U.S. Economy: Measurement and Growth Issues in the Digital Era By: Alvin J. Silk and Ernst R. Berndt
  • American Airlines' Value Pricing (Abridged) By: Sunil Gupta and Alvin J. Silk
  • Aggregate Advertising Expenditure in the U.S. Economy: What's Up? Is It Real? By: Alvin J. Silk and Ernst R. Berndt
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