Sharon Horsky

The Internalization of Advertising Services: An Inter-Industry Analysis

This study investigates the extent to which U.S. advertisers use in-house rather than independent advertising agencies and examines inter-industry variation in such internalization. Contrary to the widely-held impression that use of an in-house advertising agency is more the exception than the rule, we find that vertical integration of advertising services is much more widespread than has hitherto been appreciated. Drawing on concepts from research on scale economies and transaction costs, we develop a set of hypotheses about differences in the expected depth of internalization across industries. We test these hypotheses in cross sectional analyses of data covering 69 two digit SIC industries at two points in time, 1991 and 1999. In both years, approximately half of advertisers of all sizes operated an in-house agency. Across industries, we find that the likelihood of internalization of at least some advertising services decreases as the size of advertising outlays increase but increases as advertising intensity and technological intensity increase and is greater for “creative” industries.

Green versus Conventional Housing: Time-to-Sell and Willingness to Pay

This research is the first to explore the time-to-sell (TTS) and willingness to pay (WTP) in the context of green real estate. We employ unique data on transactions and household characteristics of owner-occupiers in newly developed green and conventionally built condominiums. We find that, after addressing the potential endogeneity between unit TTS and price, the average TTS of units in green, as compared to conventional, structures is significantly shorter. Considering developers’ financing cost, this shorter TTS is equivalent to an indirect price premium of 1.8%–5.3%. We further find that whenever the indirect green premium associated with TTS decreases, the green quality-adjusted price premium increases. Finally, we find an insignificant difference between the green and conventional structures in the correlation between household characteristics and the WTP. Our findings may serve both developers and policymakers in promoting green real estate construction.

The Modern Advertising Agency Selection Contest: A Case for Stipends to New Participants

In the modern advertising agency selection contest, each participating agency specifies not only its proposed creative campaign but also the budget required to purchase the agreed-on media. The advertiser selects the agency that offers the best combination of creative quality and media cost, similar to conducting a score auction. To participate in the contest, each agency needs to incur an up-front bid-preparation cost to cover the development of a customized creative campaign. Agency industry literature has called for the advertiser to fully reimburse such costs to all agencies that enter the contest. The authors analyze the optimal stipend policy of an advertiser facing agencies with asymmetric bid-preparation costs, such that the incumbent agency faces a lower bid-preparation cost than a competitor agency entering the contest. The authors show that reimbursing bid-preparation costs in full is never optimal, nor is reimbursing any part of the incumbents bid-preparation cost. However, a stipend that is strictly lower than the competitors bid-preparation cost can benefit the advertiser under certain conditions. The authors provide a sufficient condition (in terms of the distribution of agency values to the advertiser) for such a new-business stipend to benefit the advertiser.

Advertising Agency Selection Contest with Partial Reimbursements of Participation Costs

We model the contest among full-service advertising agencies as a score auction. The score auction allows the advertiser to select the agency that offers the best combination of creative quality and media cost, and to determine the contract price. To participate in the contest, each agency needs to incur an upfront bid-preparation cost arising from the development of a customized creative. Industry literature often calls for the advertiser to reimburse such costs to all agencies that enter the contest. e show that reimbursing bid-preparation costs in full is never optimal for the advertiser. However, a partial imbursement of the costs can be profitable under two conditions we find to be necessary: First, a sufficiently large difference must exist between the bid-preparation cost of the incumbent agency currently serving the account and that of a competitor agency wishing to replace it. Second, the population of agencies must not contain too many weak agencies that can only deliver a very small profit to the advertiser.

On Inter-Industry Variation in the Vertical Integration of Advertising Services

We investigate inter-industry variation in the relative incidence of advertisers utilization of in-house rather than independent advertising agencies. To account for this variability, we develop a set of hypotheses drawing on two perspectives that figure prominently in the literature on vertical integration. The first perspective emphasizes scale economies and double marginalization. The second perspective is that of transactions cost economics. The hypotheses are tested using a database consisting of a cross section of 70 two digit SIC industries measured at two points in time, 1991 and 1999. Confirming our first hypothesis, we found the tradeoff between the potential gains accompanying avoidance of double marginalization and the possible sacrifice of size-related scale economies tended to operate so as to decrease the likelihood of vertical integration as the size of advertising outlays increased. Consistent with three additional hypotheses suggested by transaction cost economics, we find that the likelihood of internalization of advertising services increases across industries as (i) advertising intensity increases and is greater for (ii) technological intensive and (iii) creative industries. The underlying rationale for (i) and (ii) emphasizes the role of human asset specificity while that for (iii) relates to transaction similarity and the opportunity to exploit scope economies. A fourth hypotheses suggested by transaction cost analysis, that predicted greater vertical integration of advertising services in the retailing due to temporal specificity, was rejected.