Forecasting Advertising Responsiveness for Short Lifecycle Products

Abstract

Entertainment products, such as movies, DVDs, and video games, have short lifecycles. Demand is usually highest immediately following the product release and declines rapidly in subsequent weeks. Since marketers must set advertising schedules for such products prior to launch, it is critical for them to obtain an accurate assessment of the demand responsiveness to advertising before any sales data become available. This paper introduces the problem of forecasting advertising responsiveness as a critical ingredient of marketers’ new product introduction decision support systems. The paper also solves the “slope endogeneity” problem that arises from private information possessed by managers about the heterogeneous effects of marketing mix variables on sales. Such endogeneity differs from the “intercept endogeneity” problem (which has been widely recognized in the literature) due to private information about the linear demand shifters. To correct for the slope endogeneity bias, the authors develop a conceptually simple control function approach that is amenable to multiple endogenous variables and the advertising carryover effect. Applied to the U.S. DVD market, the empirical study reveals that advertising responsiveness varies substantially across DVD titles and that estimated marketing mix elasticities would be seriously biased if the slope endogeneity problem were ignored. As the first empirical study of demand drivers and marketing mix effects in the DVD market, this analysis yields findings of substantial interest to both researchers and managers involved in entertainment marketing.

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