Advertising and Consumer Awareness of a New Product∗

The increase of a new product’s sales is usually attributed to consumers becoming informed about the existence of the product. Advertising can accelerate this consumer awareness process. This paper evaluates this effect. I develop and estimate a structural model in which the consumer purchase decision is specified using a discrete choice model with variation in the choice set, according to the information diffusion of the new products. I also model the optimal price and advertising decisions of the firm, taking into account the dynamic effect of advertising on future sales (via an increase in the proportion of consumers aware of the product). The model is estimated using Spanish automobile data. The results suggest that advertising significantly enhances the information diffusion of new products and that firms take into account in their advertising decision this dynamics. The estimates show that advertising reduces the three year it takes for the information diffusion of a new product to half as long.