Forecasting Advertising Responsiveness for Short-Lifecycle Products

Entertainment products such as movies, DVDs and video games have short life-cycles: demand is usually highest immediately following the product release and declines rapidly in subsequent weeks. Since marketers have to set advertising schedules for such products prior to launch, it is critical for them to obtain an accurate assessment of the demand responsiveness to advertising before any sales data become available. This paper introduces the problem of forecasting advertising responsiveness as a critical ingredient in marketers’ new product introduction decision support systems. The paper also solves the “slope endogeneity” problem that arises from private information possessed by managers about the heterogeneous effects of marketing-mix variables on sales. Such endogeneity is different from the “intercept endogeneity” problem (which has been widely recognized in the literature) due to private information about the linear demand shifters regardless of endogenous variables. To correct for the slope endogeneity bias, we develop a conceptually simple controlfunction approach that is amenable to multiple endogenous variables and the advertising carryover effect, and we apply this approach to the U.S. DVD market. Our results suggest that advertising responsiveness varies substantially across DVD titles and that the estimated marketing-mix elasticities would be seriously biased if the slope endogeneity problem is ignored. In addition, as the first empirical study of the demand drivers and marketing-mix effects in the DVD market, our analysis yields findings of substantial interest to both researchers and managers involved in entertainment marketing.