The effect of advertising on brand awareness and perceived quality: An empirical investigation using panel data C. Robert Clark · Ulrich Doraszelski · Michaela Draganska
Received: 11 December 2007 / Accepted: 2 April 2009 / Published online: 8 May 2009 © Springer Science + Business Media, LLC 2009
Abstract We use a panel data set that combines annual brand-level advertising expenditures for over three hundred brands with measures of brand awareness and perceived quality from a large-scale consumer survey to study the effect of advertising. Advertising is modeled as a dynamic investment in a brand’s stocks of awareness and perceived quality and we ask how such an investment changes brand awareness and quality perceptions. Our panel data allow us to control for unobserved heterogeneity across brands and to identify the effect of advertising from the time-series variation within brands. They also allow us to account for the endogeneity of advertising through recently developed dynamic panel data estimation techniques. We ﬁnd that advertising has consistently a signiﬁcant positive effect on brand awareness but no signiﬁcant effect on perceived quality. Keywords Advertising · Brand awareness · Perceived quality · Dynamic panel data methods JEL Classiﬁcation L15 · C23 · H37 C. R. Clark Institute of Applied Economics, HEC Montreal and CIRPEE, 3000 Chemin de la Cote-Sainte-Catherine, Montreal, Quebec H3T 2A7, Canada e-mail: firstname.lastname@example.org U. Doraszelski Department of Economics, Harvard University, 1805 Cambridge Street, Cambridge, MA 02138, USA e-mail: email@example.com ) M. Draganska (B Graduate School of Business, Stanford University, Stanford, CA 94305-5015, USA e-mail: firstname.lastname@example.org
C.R. Clark et al.
1 Introduction In 2006 more than $280 billion were spent on advertising in the U.S., well above 2% of GDP. By investing in advertising, marketers aim to encourage consumers to choose their brand. For a consumer to choose a brand, two conditions must be satisﬁed: First, the brand must be in her choice set. Second, the brand must be preferred over all the other brands in her choice set. Advertising may facilitate one or both of these conditions. In this research we empirically investigate how advertising affects these two conditions. To disentangle the impact on choice set from that on preferences, we use actual measures of the level of information possessed by consumers about a large number of brands and of their quality perceptions. We compile a panel data set that combines annual brand-level advertising expenditures with data from a large-scale consumer survey, in which respondents were asked to indicate whether they were aware of different brands and, if so, to rate them in terms of quality. These data offer the unique opportunity to study the role of advertising for a wide range of brands across a number of different product categories. The awareness score measures how well consumers are informed about the existence and the availability of a brand and hence captures directly the extent to which the brand is part of consumers’ choice sets. The quality rating measures the degree of subjective vertical product differentiation in the sense that consumers are led to perceive the advertised brand as being better. Hence, our data allow us to investigate the relationship between advertising and two important dimensions of consumer knowledge. The behavioral literature in marketing has highlighted the same two dimensions in the form of the size of the consideration set and the relative strength of preferences (Nedungadi 1990; Mitra and Lynch 1995). It is, of course, possible that advertising also affects other aspects of consumer knowledge. For example, advertising may generate some form of subjective horizontal product differentiation that is unlikely to be reﬂected in either brand awareness or perceived quality. In a...