Do Brand Advertising Spillovers Matter?

Abstract

ABSTRACT This article examines the spillover effects of television brand advertising on consumer demand, using carbonated soft drinks as a case study. Spillover effects are modeled using the conventional linear and constant elasticity of substitution (CES) advertising production functions. The latter allows for imperfect substitution between brand advertising and spillovers from advertising all other brands belonging to the same company as well as relaxes the assumption of constant returns to scale. Empirical results confirm strong and positive brand advertising spillover effects across brands belonging to the same company as well as negative spillover effects from advertising by competitors. Empirical results also indicate that the CES advertising production function outperforms the linear function, providing strong support for decreasing returns to scale in advertising and imperfect substitution between brand advertising and advertising of other brands in the same company. Finally, the CES function results in significantly higher estimates of the price elasticities of demand as well as lower estimated markups. [EconLit citations L13, L66, M37].

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