Advertising and Consumer Awareness of New, Differentiated Products

Abstract

This article proposes a novel approach to assess the dynamic effect that advertising expenditures have on which products consumers include in their choice sets. In a discrete-choice model, consumers face choice sets that evolve according to their awareness of each product. Advertising expenditures have a dynamic effect in the sense that they raise consumer awareness of a product, increasing present and future sales. To estimate this effect, the authors explicitly model the firms’ dynamic advertising decisions and illustrate the model using data from the Spanish automobile market. The results show that the effect of advertising on awareness is dynamic and that accounting for it is crucial in explaining the evolution of product sales over its life cycle. Furthermore, the authors demonstrate that the awareness process can be significantly sped up by advertising. Thus, there is a great heterogeneity in the length of the awareness process among products, depending on the level of advertising expenditures; it may range from one to six years.

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