Mass Advertising as a Natural Experiment

Abstract

Increasingly, firms have the ability to make high quality, micro-level predictions of demand for their products, which improves their ability to target advertising. In spite of this, firms may choose to target advertising at a higher level of aggregation than their predictions allow in order to benefit from the significant discounts that often accompany mass advertising purchases. We argue that firms making such a choice generate “advertising spillovers” that are quasi-random and can be used to identify the response to advertising. These advertising spillovers occur when local levels of advertising are higher or lower than locally optimal due to the influence of other markets or individuals on the mass advertising decision. We formalize the supply-side conditions which incentivize firms to generate these spillovers as part of their optimization strategy, present an empirical strategy for exploiting these conditions, and apply the strategy to multiple product categories and brands. Estimates from this “spillover strategy” agree with recent literature that suggests many standard approaches to estimating the response to advertising may produce biased results due to unobservables; our estimates also suggest that some recent empirical strategies (e.g., the “border strategy” from Shapiro 2018), can produce biased estimates for seasonal products.