Brett Gordon

Measuring Long-Run Marketing Effects and Their Implications for Long-Run Marketing Decisions

Coauthor(s): Bart Bronnenberg, J. P. Dubé, Carl Mela, Paulo Albuquerque, Tulin Erdem, Dominique Hanssens, Gunter Hitsch, Han Hong, Baohong Sun. View Publication

Abstract:
The empirical measurement of long-run (or "carry-over") effects from marketing effort is a central topic in marketing. A long literature has sought to measure these carry-over effects empirically and to assess their relevance to marketing decision-making. These efforts have led to several interesting stylized facts. For example, advertising and prices exhibit carryover effects on future prices and sales (Assmus, Farley and Lehman 1984 and Kalyanaram and Winer 1995 respectively). Similarly, the Bass diffusion model (1969) predicts a pattern of new product diffusion that has been replicated in many industries. Finally, market shares in many product categories are found to be mean and covariance-stationary over time, suggesting the emergence of a long-run equilibrium (Dekimpe and Hanssens 1995). In this discussion piece, we advance this literature on long-run effects by elaborating upon microeconomic theories to explain these dynamic phenomena. We also examine normative applications to recommend improved marketing policies based on structurally estimating models derived from the microeconomic theories.

A central element in this literature is the role of agents' (e.g., consumers and firms) beliefs about future outcomes. For instance, a consumer might base her current shopping decisions on her beliefs about future prices (e.g., forward-buying a stockpile). Similarly, a firm might base its current marketing decisions on beliefs about future competition (e.g., precipitate a product launch to preempt future competitive entry). We use the term forward-looking to denote the incorporation of future beliefs into current decision-making. Understanding the complex role of expectations about the future and how they govern various agents' behavior constitutes a significant opportunity to enrich empirical research in marketing. The role of future beliefs can be central to the incidence of fundamentally different equilibrium behavior in a dynamic environment relative to a myopic one. Accordingly, we begin with a general discussion of the role of agents' beliefs and their implications for behavioral dynamics. We also discuss the corresponding planning problems facing both firms and consumers in their current decision-making. After our general discussion of the consumer and firm problem, we present some illustrative examples of some of the extant empirical literature on dynamic choice behavior.

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