The effect of television advertising on consumer price sensitivity : an investigation of frequently purchased products

The central question studied is whether household price sensitivity increases or decreases as the number of exposures to television advertising increases. As a means of answering this question, Salop's (1979) model of brand differentiation is generalized to incorporate advertising as a managerial decision variable. Salop's generalized model is linked to a random utility choice model to estimate the effects of advertising on consumer price sensitivity. The random utility choice models are then estimated using household level scanner panel data for two product categories (dry dog food and aluminum foil). The generalization of Salop's model shows that the direct effect of a firm's increased advertising is a lowering of price sensitivity. In addition, the model also shows that increased advertising may result in a higher or lower price sensitivity depending upon the advertising reaction of competitors. The empirical results for both product categories studied indicate that increased advertising is associated with higher price sensitivity. However, since the aluminum foil product category has only one major national advertiser, the results here cannot be fully explained by Salop's generalized model and thus show an important limitation of the model's applicability. Brand loyalty has proved to be the most important explanatory variable in random utility brand choice models for low cost brand identified consumer products (Guadagni and Little 1983). This dissertation develops a new measure of brand loyalty that is sensitive to the temporal pattern of household's previous brand purchases. For the product categories, studied, this new measure is superior to those proposed earlier. In addition, this work confirms the robust nature of Guadagni and Little's (1983) model of brand choice and shows that both television advertising and sales promotional variables have a significant impact on brand choice.