Advertising and consumer choice: A model for the Spanish automobile industry of the 90 ́s

This paper assesses the role of advertising in the demand of a differenciated and infrequently purchased good market. Advertising enters directly in the demand as goodwill stock with decreasing returns. Demand is specified and estimated in a discrete choice model approach, which allows us to compute the predatory and spillover effects of advertising and different sensibilities to advertising across market segments. The model is applied to the Spanish automobile industry during the nineties, that turns out to be a suitable environment to perform the study (differentiated good market with high advertising intensity). Results suggest an important sensibility of the demand to advertising, that changes across automobile segments, and a significant carryover effect and a predatory component of advertising. Moreover,I show that the price eslasticies of demand are overestimated when advertising is not included in the estimation. Key word: Advertising, Discrete Choice Model, Differentiated and Infrequently Purchased Good Market, Spillover and Predatory Effect, Stock of Goodwill. JEL Classification: M37, L13. The paper is competing to the Young Economist Award. ∗E-mail: [email protected]