THESIS
2015
iv, 47 pages : illustrations ; 30 cm
Abstract
Numerous real business stories of success are accompanied by impressive advertising
campaigns. Huge amount of work has been done with regard to different functions of
advertising, however less has been addressing on how advertising spending is determined.
This paper uses the dynamic linear model and borrows ideas from classic advertising
textbooks, which claims that three main factors, which are previous years’ sales (percentage
of previous years’ sales), strategic learning process and competitive advertising, determine
advertising expenditures. To investigate this issue, the author empirically tests whether firms
are sophisticated and can perform all three determinants when making advertising expenditure
decisions. This paper employs the Bayesian paradigm and MCMC (Monte Carlo...[
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Numerous real business stories of success are accompanied by impressive advertising
campaigns. Huge amount of work has been done with regard to different functions of
advertising, however less has been addressing on how advertising spending is determined.
This paper uses the dynamic linear model and borrows ideas from classic advertising
textbooks, which claims that three main factors, which are previous years’ sales (percentage
of previous years’ sales), strategic learning process and competitive advertising, determine
advertising expenditures. To investigate this issue, the author empirically tests whether firms
are sophisticated and can perform all three determinants when making advertising expenditure
decisions. This paper employs the Bayesian paradigm and MCMC (Monte Carlo Markov
Chain) techniques to estimate the equation system. The findings indicate that managers do
consider the previous advertising performance and previous sales when making current
decisions, but on average, they just look back up to two periods to collect information.
Moreover, managers differ in their altitudes toward the advertising elasticity, which means the
degree of importance to which different firms consider last two periods’ advertising
performance can differ largely. But firms averagely have similar altitudes on the determinants
of “percentage of previous years’ sales”. Given the limitation of data, the competitive effect is
generally not significant and this is because either the author cannot distinguish firms’
competitors among all others in a same industry, or that in a crowed industry small and
mid-size firms are insensitive to changes of others’ advertising strategy.
Based on the research experiences above, starting from researching on firms’ advertising
behavior to test for and develop the general theorem within this field. My future research in this topic should extend to include all four marketing strategies, namely discounting,
advertising, distribution breadth and product activity, to identify some missing dynamic
effects in this study.
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