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The Effectiveness and Targeting of Television Advertising RON SHACHAR Tel-Aviv University Tel-Aviv, Israel, 69978 shachar @econ.tau.ac.il BHARAT N. ANAND Harvard Business School Boston, MA 02163 banand@hbs.edu Television networks spend about 16% of their revenues on tune-ins, which are previews or advertisements for their own shows. In this paper, we examine two questions. First, what is the informational content in advertis- ing? Second, is this level of expenditures consistent with profit maximiza- tion? To answer these questions, we use a new and unique micro-level panel dataset on the television viewing decisions of a large sample of individuals, matched with data on show tune-in advertisements. The difference in ( effectiveness of advertisements between ‘‘regular’’ shows about which view- ) ers are assumed to have substantial information a priori and ‘‘specials’’ ( ) about which they have very little reveals the value of information in advertisements and the different roles that information can play. The number of exposures for each individual is likely to be correlated with their preferences, since networks target their audiences. We address this endogene - ity problem by controlling for observed, and integrating the unobserved, characteristics of individuals, and find that the estimated effects of tune-ins are still large. Finally, we find that actual expenditures on tune-ins closely match the predicted optimal levels of spending. 1. Introduction Advertising expenditures by television networks are substantial . In 1995, for example, the three major networks spent approximately We would like to thank Greg Kasparian and David Poltrack of CBS for their help in obtaining the data for this study, John W. Emerson for comments and assistance in programming, and Barry Nalebuff, Subrata Sen, Idit Shachar, and many of our colleagues for helpful discussions. Q 1998 Massachusetts Institute of Technology . Journal of Economics & Management Strategy, Volume 7, Number 3, Fall 1998, 363 ] 396
34

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Page 1: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting ofTelevision Advertising

RON SHACHAR

Tel-Aviv UniversityTel-Aviv Israel 69978shacharecontauacil

BHARAT N ANAND

Harvard Business SchoolBoston MA 02163banandhbsedu

Television networks spend about 16 of their revenues on tune-ins whichare previews or advertisements for their own shows In this paper weexamine two questions First what is the informational content in advertis-ing Second is this level of expenditures consistent with profit maximiza-tion To answer these questions we use a new and unique micro-level paneldataset on the television viewing decisions of a large sample of individualsmatched with data on show tune-in advertisements The difference in

(effectiveness of advertisements between lsquolsquoregularrsquorsquo shows about which view-)ers are assumed to have substantial information a priori and lsquolsquospecialsrsquorsquo

( )about which they have very little reveals the value of information inadvertisements and the different roles that information can play Thenumber of exposures for each individual is likely to be correlated with theirpreferences since networks target their audiences We address this endogene-ity problem by controlling for observed and integrating the unobservedcharacteristics of individuals and find that the estimated effects of tune-insare still large Finally we find that actual expenditures on tune-ins closelymatch the predicted optimal levels of spending

1 Introduction

Advertising expenditures by television networks are substantial In1995 for example the three major networks spent approximately

We would like to thank Greg Kasparian and David Poltrack of CBS for their help inobtaining the data for this study John W Emerson for comments and assistance inprogramming and Barry Nalebuff Subrata Sen Idit Shachar and many of ourcolleagues for helpful discussions

Q 1998 Massachusetts Institute of Technology Journal of Economics amp Management Strategy Volume 7 Number 3 Fall 1998 363 ] 396

Journal of Economics amp Management Strategy364

16 of their revenues on tune-in advertisements1 more than twice asmuch as firms in other industries The networks also rank among thetop ten firms in the economy in terms of dollars of advertisingexpenditures2 This raises an obvious question are networks spend-ing too much on advertising3 Indeed one may suspect that net-works underestimate their advertising costs since these are mostlyopportunity costs consequently advertising expenditures might ex-ceed the optimal amount Answering this question requires an under-standing of the effects of tune-ins on individualsrsquo viewing choicessince advertising revenues are a function of show ratings which areaggregations of individual viewing decisions In this study we esti-mate these effects using a new and unique micro-level panel dataseton the television viewing decisions of a large sample of individualsmatched with data on show tune-ins

The second question that we address in this paper is of moregeneral interest what is the informational value of advertising Aspirited debate on whether advertising is lsquolsquoinformativersquorsquo or lsquolsquopersua-siversquorsquo has gone on for some time4 Understanding the relative impor-tance of informing and persuading has both positive and normativeimplications However distinguishing these effects empirically isdifficult We base our solution to this identification problem on thefollowing logic if advertising has information content then the ef-fects of tune-ins on viewing decisions should differ across showsaccording to individualsrsquo prior information about each show Forexample individuals may possess very little information about the

( )timing and attributes of shows that are aired oncemdash specials com-( ) 5pared to shows that are aired frequently regulars We estimate the

differential effects of tune-ins on viewing decisions for these two

1 lsquolsquoTune-inrsquorsquo usually refers to an advertisement for a television show Advertise-ments for TV shows represent a cost for the networks and other advertisements supplytheir revenues The ads we focus on in this paper are of the first type

2 The networks usually air 12 minutes of commercials during each hour ofprogramming In 1995 they used about 2 of these 12 minutes on tune-ins for theirshows Since advertising revenues represent almost all of the networksrsquo revenues andtune-ins represent most of their advertisement effort we proxy the share of revenuesspent on advertisements as 16 We then estimate their spending on advertising indollars using these numbers and data on networksrsquo revenues

( )3 Roberts and Samuelson 1988 use a different approach than ours to answer asimilar question in the context of the tobacco industry

( ) ( )4 Early work on this can be traced to Galbraith 1967 and Solow 1967 Tirole( )1989 pp 289 ] 290 labels these as the lsquolsquopartialrsquorsquo view versus the lsquolsquoadversersquorsquo view ofadvertising For models dealing explicitly with the informational effects of advertising

( ) ( )see Butters 1977 and Grossman and Shapiro 1984 5 This is similar to the oft-cited distinction between lsquolsquosearchrsquorsquo goods and lsquolsquoexperi-

encersquorsquo goods although not identical since regular shows have features common to bothtypes of goods

The Effectiveness and Targeting of Television Advertising 365

kinds of shows If there were no informational content in advertisingthen the effects of tune-ins should not differ across such shows withdifferent preexisting lsquolsquoinformation stocksrsquorsquo Thus the product varia-tion in the data provides us with a clear way to identify the informa-tional value of advertising6

Our estimates of the effects of tune-ins may be biased sincenetworks generally target their tune-ins for each show towards cer-tain groups of individuals For example tune-ins for comedies aremore often aired during other comedies thus targeting individualsmost likely to watch comedies in the first place If these unobserveddifferences in individual preferences are not controlled for the effectsof tune-ins on viewership will be upward biased We deal explicitlywith this endogeneity problem in the estimation below To ourknowledge no other micro-level study addresses this issue in anydetail7

This is the first study focusing explicitly on the effects of tune-inadvertisements on individual behavior8 There are two main advan-tages of examining the effects of advertising in the TV industry Firstadvertising is undertaken by firms using in general various instru-

( ) (ments price discounts promotions etc and various media televi-)sion billboards magazines etc These different forms of advertising

may be substitutes or complements in consumption9 for example themarginal effectiveness of magazine ads may depend on the amountof advertising generated by other means concurrently or in the pastIn order to accurately estimate the marginal effectiveness of a particu-lar form of advertising or assess the relative efficacy of alternativeforms of advertising one would require data on the amount ofadvertising via other forms this is usually difficult to obtain Thisissue is of less concern in the TV industry for two reasons firstalmost all advertising by networks is in the form of tune-ins secondthe price of TV services is zero from an individualrsquos standpointHence we do not need to consider issues arising from the existenceof multiple advertising inputs

6 A few previous studies attempt to distinguish informative effects from persua-sive effects in advertising either by subjective measurement of the information content

( )in ads Resnik and Stern 1978 or by econometric identification techniques similar to( )ours Ackerberg 1995 All these studies focus on single-product returns of advertising

7 The targeting of advertising may be important in contexts of both repeat andnonrepeat purchase and hence is likely to be an issue of general concern

( ) ( )8 See for example Berndt 1991 or Tellis and Weiss 1995 for surveys of theliterature on the effects of advertising

9 Strictly the advertising itself is not consumed rather ads may convey informa-tion that is of value in making decisions

Journal of Economics amp Management Strategy366

Second previous studies suggest that the returns to advertisingmay differ across products10 These differences are useful in revealingthe different roles of advertising in influencing individual choice

However it is difficult to compare results across studies givennonuniformity in datasets methodologies or products under exami-nation Since our dataset contains information for multiple TV showsthat in principle differ substantially in their attributes we canexamine such cross-product differences within a common setting

Our focus here is only on characterizing the variation between regu-lars and specials we plan to further exploit the product variation inthe dataset in future research on this issue

The rest of the paper is organized as follows We first describethe datasets used since this assists in understanding the structure ofthe model In Section 2 we describe the construction of the datasetand present descriptive statistics on the sample population viewer-ship patterns show characteristics and characteristics of tune-ins InSection 3 we present the model used to estimate the effects oftune-ins and discuss identification issues We discuss the results inSection 4 and their implications for network strategies in Section 5 InSection 6 we discuss issues for further study

2 The Datasets

We use three datasets in this study The first includes data on theviewing choices of about 17000 individuals during one week inNovember 1995 The second describes the attributes of the showsoffered to these individuals by the four leading networks during thisweek The number of tune-ins for each show and the time of theirairing constitute the third data set

Nielsen Media Research maintains a sample of over 5000 house-( )holds nationwide by installing a Nielsen People Meter NPM for

each television set in the household Using 1990 Census data thesample is designed to reflect the demographic composition of viewersnationwide The sample is revised regularly ensuring in particularthat no single household remains in the sample for more than twoyears

The NPM uses a special remote control to record arrivals anddepartures of individual viewers as well as the channel beingwatched on each television set Although the NPM is calibrated for

( )10 For example Batra et al 1995 summarize the variation in estimated returnsacross products examined in prior studies For conflicting results regarding the exis-

( )tence of diminishing returns to advertising see Simon and Arndt 1980 and Rao and( )Miller 1975

The Effectiveness and Targeting of Television Advertising 367

measurements each minute the data set available to Nielsen clientsprovides a record of whether or not each viewer tuned into each ofthe alternatives during each quarter hour

The raw dataset records whether or not an individual waswatching television in each quarter hour and if so her choice ofnetwork An individual who was watching television but did notchoose any network is coded as watching a nonnetwork channelThis might be a cable channel PBS or a local independent channelEach quarter hour is defined as a time slot

We use the data for prime time 800 to 1100 PM for the fiveweekdays starting Monday November 6 1995 Thus we observeviewersrsquo choices in 60 time slots Table I presents the programming of

( )the four major networks ABC CBS NBC and FOX over this timeperiod This study confines itself to east-coast viewers to avoidproblems arising from ABCrsquos Monday night programming ABCfeatures Monday Night Football broadcast live across the countrydepending on local starting and ending times of the football gameABC affiliates across the country fill their Monday night schedulewith a variety of other shows Adjusting for these programmingdifferences by region would unnecessarily complicate this study

Finally viewers who never watched television during weeknightprime time and those younger than six years of age are eliminatedfrom the sample From this group we randomly select 1675 individu-als Their viewing choices provide an adequate and rich set ofinformation that is used in the estimation

( )Most individuals chose not to watch TV 555 in any given( )time slot and many preferred to watch a nonnetwork channel 184

NBC was the most watched network with 89 of the individuals( )tuned in on average in a given time slot followed by ABC 77

( ) ( )CBS 61 and FOX a distant fourth 36 The highest-rated show(during the week under consideration was ER a medical drama on

) 11NBC with a 21 share while the CBS news magazine 48 Hourshad the lowest rating with a 29 share An interesting aspect ofviewing behavior was the persistence in choices of individuals Twoout of any three viewers in any given time slot watched the samechannel in the previous time slot The degree of persistence was evenhigher across time slots spanned by a single show and variedaccording to demographic characteristics12

(11 lsquolsquoSharersquorsquo is defined here to be the fraction of all individuals including those)who do not watch TV who are tuned in to the show in the given time slot

( )12 Shachar and Emerson 1996 examine the phenomenon of persistence in moredetail using the same dataset

Journal of Economics amp Management Strategy368

Day Network 800 830 900 930 1000 1030

Mon ABC The Marshal Pro Football Philadelphia at Dallas

CBS The Nanny Canrsquot HurryLove

Murphy Brown High Society Chicago Hope

NBC Fresh Princeof Bel-Air

In the House Movie She Fought Alone

FOX Melrose Place Beverly Hills 90210 Affiliate Programming News

Tue ABC Roseanne Hudson Street HomeImprovement

Coach NYPD Blue

CBS The Client Movie Nothing Lasts Forever

NBC Wings News Radio Frasier Pursuit ofHappiness

Dateline NBC

FOX Movie Bram Stokerrsquos Dracula Affiliate Programming News

Wed ABC Ellen The DrewCarey Show

Grace UnderFire

The NakedTruth

Prime Time Live

CBS Bless thisHouse

Daversquos World Central Park West Courthouse

NBC Seaquest 2032 Dateline NBC Law amp Order

FOX Beverly Hills 90210 Party of Five Affiliate Programming News

Thu ABC Movie Columbo Itrsquos All in the Game Murder One

CBS Murder She Wrote New York News 48 Hours

NBC Friends The SingleGuy

Seinfeld Caroline inthe City

ER

FOX Living Single The Crew New York Undercover Affiliate Programming News

Fri ABC FamilyMatters

Boy MeetsWorld

Step by Step Hanginrsquo WithMr Cooper

2020

CBS Here Comes the Bride Ice Wars USA vs The World

NBC Unsolved Mysteries Dateline NBC Homicide Life on the Street

FOX Strange Luck X-Files Affiliate Programming News

The purpose of this study is to examine the effects of tune-inson viewing decisions In Section 3 we present the viewing-choicemodel that we use to estimate these effects The structure of this

( )model is similar to that of Shachar and Emerson 1996 which foundthat demographic characteristics of a showrsquos cast and of individuals

The Effectiveness and Targeting of Television Advertising 369

table II

Summary Statistics IndividualDemographic Characteristics

aVariable Mean Std Dev

Kids 00794 02704Teens 00627 02425Gen-X 02400 04272Boom 02764 04474Old 04191 04936Female 05319 04991Male 04681 04991Family 04304 04953Adult 08579 03492Income 08333 02259Educat 07421 02216Urban 04149 04929Basic 03642 04813Premium 03588 04798

a ( )Definitions dummy variables unless otherwise specified lsquolsquoKidsrsquorsquo individu al is between the ages of 7and 11 lsquolsquoTeensrsquorsquo individual is between the ages of 12 and 17 lsquolsquoGen-Xrsquorsquo individu al is between the ages of18 and 34 lsquolsquoBoomrsquorsquo individual is between the ages of 35 and 49 lsquolsquoOldrsquorsquo individu al is age 50 or olderlsquolsquoFemalersquorsquo individual is a female lsquolsquoM alersquorsquo individu al is a male lsquolsquoFamilyrsquorsquo individu al lives in a householdwith a female older than 18 and her kids lsquolsquoAdu ltrsquorsquo individual is older than 18 lsquolsquo Incom ersquorsquo there are sixlevels of incom e on the unit interval lsquolsquoEdu catrsquorsquo there are five categories of education on the unit intervallsquolsquoUrbanrsquorsquo individu al lives in an urban area lsquolsquoBasicrsquorsquo individu al has basic cable lsquolsquoPremiumrsquorsquo individu al haspremium cable

as well as five show attributesmdashaction comedy romance suspenseand fictionmdashare important in explaining viewing decisions We brieflydescribe each of these variables below

Table II defines all the individual demographic variables andpresents their summary statistics Show demographics are describedin Table III In Table IV we present the various attributes for eachshow each of which is normalized to lie between 0 and 1 Theseattributes were subjectively measured by four research assistantswho both watched the entire tapes of the weekrsquos shows and usedpreexisting knowledge about the shows in constructing these mea-sures13

13 For details on the construction of these attribute measures see Shachar and( )Emerson 1996

Journal of Economics amp Management Strategy370

table III

Summary Statistics Cast Demographicsof Shows

Show Cast Mean Std Dev

Gen-X 03438 04787Boom 02813 04532Family 01719 03802Male 04531 05017Female 02500 04364Black 00727 02603

( )Definitions all dummy variables lsquolsquoGen-Xrsquorsquo the main characters in the show are between the ages of 18and 34 lsquolsquoBoomrsquorsquo the main characters in the show are between the ages of 35 and 49 lsquolsquoFamilyrsquorsquo the maincharacters in the show are members of a family lsquolsquoM alersquorsquo the main characters in the show are malelsquolsquoFemalersquorsquo the main characters in the show are female lsquolsquoBlackrsquorsquo the main characters in the show are black

table IV

Show Attributes

Show Network Action Comedy Fiction Romance Suspense

Fresh Prince of Bel-Air NBC 011 100 067 050 020Melrose Place FOX 033 000 067 075 080The Marshal ABC 056 000 067 038 060The Nanny CBS 000 100 067 063 020Canrsquot Hurry Love CBS 000 100 067 088 020In The House NBC 022 100 067 025 020Pro Football ABC 100 014 000 000 100Beverly Hills 90210 FOX 022 043 067 100 060She Fought Alone NBC 067 029 033 075 080Murphy Brown CBS 011 100 067 050 020High Society CBS 000 100 067 038 020Chicago Hope CBS 067 014 033 063 080Roseanne ABC 000 100 067 075 020Bram Stoker rsquos Dracula FOX 067 000 100 063 080Wings NBC 011 100 067 075 020The Client CBS 022 014 033 025 060NewsRadio NBC 000 100 067 038 020Hudson Street ABC 000 100 067 088 020Nothing Lasts Forever CBS 033 000 067 063 080Home Improvement ABC 022 100 067 075 020Frasier NBC 000 100 067 063 020Pursuit of Happiness NBC 000 100 067 088 020Coach ABC 000 100 067 063 020Dateline NBC NBC 022 000 000 000 040NYPD Blue ABC 056 014 033 063 080Bless This House CBS 000 100 067 050 020Ellen ABC 000 100 067 025 020

The Effectiveness and Targeting of Television Advertising 371

table IV( )Continued

Show Network Action Comedy Fiction Romance Suspense

Beverly Hills 90210 FOX 022 043 067 100 100Seaquest 2030 NBC 100 000 100 013 080The Drew Carey Show ABC 011 100 067 000 020Daversquos World CBS 000 100 067 050 020Dateline NBC NBC 011 000 000 000 080Party of Five FOX 000 029 067 100 020Grace Under Fire ABC 000 100 067 038 020Central Park West CBS 022 014 067 075 080The Naked Truth ABC 011 100 067 088 020Law and Order NBC 067 043 033 013 100Courthouse CBS 033 029 067 088 080Prime Time Live ABC 078 014 000 025 080Murder She Wrote CBS 044 014 067 038 080Living Single FOX 000 100 067 075 040Columbo It rsquos All in the Game ABC 044 043 067 075 080Friends NBC 000 100 067 088 060The Crew FOX 000 100 067 063 020The Single Guy NBC 000 100 067 088 020Seinfeld NBC 011 100 067 063 060New York News CBS 056 014 033 050 060New York Undercover FOX 089 029 033 050 100Caroline in the City NBC 000 100 067 100 02048 Hours CBS 022 000 000 025 040ER NBC 100 029 033 050 080Murder One ABC 033 000 033 050 080Strange Luck FOX 078 029 100 050 080Family Matters ABC 022 100 067 050 020Unsolved Mysteries NBC 044 000 033 000 100CBS Friday Night Movie CBS 033 100 000 050 020Boy Meets World ABC 022 100 067 050 020Ice Wars USA vs The World CBS 078 014 000 000 060X-Files FOX 100 029 100 025 100Step by Step ABC 000 100 067 075 020Dateline NBC NBC 022 014 000 025 040Hanginrsquo with Mr Cooper ABC 022 100 067 050 020Homicide Life on the Street NBC 067 029 033 013 10020 r 20 ABC 022 013 000 013 040

The variable Tune In indicates whether there was a tune-injt(advertisement for a show jt ie a show on network j in a given time

)slot t in each time slot during the week Obviously there are notune-ins for a show in any time slot subsequent to when it is aired

Table V presents the shows ordered by their number of tune-ins

Journal of Economics amp Management Strategy372

table V

Show Tune-Ins

Show Network Day Tune-Ins

The Nanny CBS Monday 0The Marshal ABC Monday 0Melrose Place FOX Monday 0Fresh Prince of Bel-Air NBC Monday 0Pro Football ABC Monday 1Home Improvement ABC Tuesday 2Roseanne ABC Tuesday 2Coach ABC Tuesday 2Beverly Hills 90210 FOX Monday 2Family Matters ABC Friday 2Wings NBC Tuesday 2NYPD Blue ABC Tuesday 2X-Files FOX Friday 2Murphy Brown CBS Monday 2Hudson Street ABC Tuesday 2Canrsquot Hurry Love CBS Monday 2In The House NBC Monday 2Chicago Hope CBS Monday 2Ellen ABC Wednesday 3Bram Stoker rsquos Dracula FOX Tuesday 3Dateline NBC NBC Wednesday 3Boy Meets World ABC Friday 3Seaquest 2030 NBC Wednesday 3Step by Step ABC Friday 3Unsolved Mysteries NBC Friday 3Hanginrsquo with Mr Cooper ABC Friday 3Grace Under Fire ABC Wednesday 3High Society CBS Monday 3The Naked Truth ABC Wednesday 3Dateline NBC NBC Friday 3Courthouse CBS Wednesday 4Strange Luck FOX Friday 4NewsRadio NBC Tuesday 4The Client CBS Tuesday 4Homicide Life on the Street NBC Friday 4Frasier NBC Tuesday 4New York Undercover FOX Thursday 4Living Single FOX Thursday 4Law amp Order NBC Wednesday 4She Fought Alone NBC Monday 4The Drew Carey Show ABC Wednesday 4Bless This House CBS Wednesday 4Nothing Lasts Forever CBS Tuesday 5Columbo It rsquos All in the Game ABC Thursday 5Pursuit of Happiness NBC Tuesday 5Dateline NBC NBC Tuesday 5

The Effectiveness and Targeting of Television Advertising 373

table V( )Continued

Show Network Day Tune-Ins

Beverly Hills 90210 FOX Wednesday 5The Crew FOX Thursday 5Central Park West CBS Wednesday 5Murder She Wrote CBS Thursday 6Daversquos World CBS Wednesday 6Party of Five FOX Wednesday 6Prime Time Live ABC Wednesday 6CBS Friday Night Movie CBS Friday 6Seinfeld NBC Thursday 6Friends NBC Thursday 6The Single Guy NBC Thursday 7Ice Wars USA vs The World CBS Friday 7Caroline in the City NBC Thursday 7Murder One ABC Thursday 8New York News CBS Thursday 820 r 20 ABC Friday 8ER NBC Thursday 948 Hours CBS Thursday 10

Since the data contain information only on tune-ins that were airedon prime time starting on Monday it is not surprising that the showson Monday have fewer tune-ins than do shows aired later in theweek Interestingly the three shows with the largest number oftune-ins were aired in the same time-slot Thursday at 1000 PM Thismay indicate the strategic use of tune-ins by networks

The variable Count indicates the number of times that ani jt

individual i was exposed to a tune-in for a show jt This variable wascreated by matching the Nielsen data on individualsrsquo viewing choiceswith the information in Tune In In principle the effect of tune-insjt

can then be estimated by examining the effects of this variable onindividual viewing decisions after controlling for other characteris-tics The resulting estimates will be biased in general however Thefollowing example illustrates the source of this bias

Eight tune-in advertisements for the ABC news magazine 20 r 20aired during the following time slots and shows Monday 1030( ) ( ) (Monday Night Football Tuesday 945 Coach Tuesday 1015 NYPD

) ( ) (Blue Wednesday 915 Grace Under Fire Wednesday 1015 Prime) ( ) (Time Live Thursday 915 Movie Columbo Thursday 1015 Murder

) ( )One and Friday 945 Hanginrsquo with Mr Cooper In Table VI weestimate a probit model to test the hypothesis that individuals who

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 2: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy364

16 of their revenues on tune-in advertisements1 more than twice asmuch as firms in other industries The networks also rank among thetop ten firms in the economy in terms of dollars of advertisingexpenditures2 This raises an obvious question are networks spend-ing too much on advertising3 Indeed one may suspect that net-works underestimate their advertising costs since these are mostlyopportunity costs consequently advertising expenditures might ex-ceed the optimal amount Answering this question requires an under-standing of the effects of tune-ins on individualsrsquo viewing choicessince advertising revenues are a function of show ratings which areaggregations of individual viewing decisions In this study we esti-mate these effects using a new and unique micro-level panel dataseton the television viewing decisions of a large sample of individualsmatched with data on show tune-ins

The second question that we address in this paper is of moregeneral interest what is the informational value of advertising Aspirited debate on whether advertising is lsquolsquoinformativersquorsquo or lsquolsquopersua-siversquorsquo has gone on for some time4 Understanding the relative impor-tance of informing and persuading has both positive and normativeimplications However distinguishing these effects empirically isdifficult We base our solution to this identification problem on thefollowing logic if advertising has information content then the ef-fects of tune-ins on viewing decisions should differ across showsaccording to individualsrsquo prior information about each show Forexample individuals may possess very little information about the

( )timing and attributes of shows that are aired oncemdash specials com-( ) 5pared to shows that are aired frequently regulars We estimate the

differential effects of tune-ins on viewing decisions for these two

1 lsquolsquoTune-inrsquorsquo usually refers to an advertisement for a television show Advertise-ments for TV shows represent a cost for the networks and other advertisements supplytheir revenues The ads we focus on in this paper are of the first type

2 The networks usually air 12 minutes of commercials during each hour ofprogramming In 1995 they used about 2 of these 12 minutes on tune-ins for theirshows Since advertising revenues represent almost all of the networksrsquo revenues andtune-ins represent most of their advertisement effort we proxy the share of revenuesspent on advertisements as 16 We then estimate their spending on advertising indollars using these numbers and data on networksrsquo revenues

( )3 Roberts and Samuelson 1988 use a different approach than ours to answer asimilar question in the context of the tobacco industry

( ) ( )4 Early work on this can be traced to Galbraith 1967 and Solow 1967 Tirole( )1989 pp 289 ] 290 labels these as the lsquolsquopartialrsquorsquo view versus the lsquolsquoadversersquorsquo view ofadvertising For models dealing explicitly with the informational effects of advertising

( ) ( )see Butters 1977 and Grossman and Shapiro 1984 5 This is similar to the oft-cited distinction between lsquolsquosearchrsquorsquo goods and lsquolsquoexperi-

encersquorsquo goods although not identical since regular shows have features common to bothtypes of goods

The Effectiveness and Targeting of Television Advertising 365

kinds of shows If there were no informational content in advertisingthen the effects of tune-ins should not differ across such shows withdifferent preexisting lsquolsquoinformation stocksrsquorsquo Thus the product varia-tion in the data provides us with a clear way to identify the informa-tional value of advertising6

Our estimates of the effects of tune-ins may be biased sincenetworks generally target their tune-ins for each show towards cer-tain groups of individuals For example tune-ins for comedies aremore often aired during other comedies thus targeting individualsmost likely to watch comedies in the first place If these unobserveddifferences in individual preferences are not controlled for the effectsof tune-ins on viewership will be upward biased We deal explicitlywith this endogeneity problem in the estimation below To ourknowledge no other micro-level study addresses this issue in anydetail7

This is the first study focusing explicitly on the effects of tune-inadvertisements on individual behavior8 There are two main advan-tages of examining the effects of advertising in the TV industry Firstadvertising is undertaken by firms using in general various instru-

( ) (ments price discounts promotions etc and various media televi-)sion billboards magazines etc These different forms of advertising

may be substitutes or complements in consumption9 for example themarginal effectiveness of magazine ads may depend on the amountof advertising generated by other means concurrently or in the pastIn order to accurately estimate the marginal effectiveness of a particu-lar form of advertising or assess the relative efficacy of alternativeforms of advertising one would require data on the amount ofadvertising via other forms this is usually difficult to obtain Thisissue is of less concern in the TV industry for two reasons firstalmost all advertising by networks is in the form of tune-ins secondthe price of TV services is zero from an individualrsquos standpointHence we do not need to consider issues arising from the existenceof multiple advertising inputs

6 A few previous studies attempt to distinguish informative effects from persua-sive effects in advertising either by subjective measurement of the information content

( )in ads Resnik and Stern 1978 or by econometric identification techniques similar to( )ours Ackerberg 1995 All these studies focus on single-product returns of advertising

7 The targeting of advertising may be important in contexts of both repeat andnonrepeat purchase and hence is likely to be an issue of general concern

( ) ( )8 See for example Berndt 1991 or Tellis and Weiss 1995 for surveys of theliterature on the effects of advertising

9 Strictly the advertising itself is not consumed rather ads may convey informa-tion that is of value in making decisions

Journal of Economics amp Management Strategy366

Second previous studies suggest that the returns to advertisingmay differ across products10 These differences are useful in revealingthe different roles of advertising in influencing individual choice

However it is difficult to compare results across studies givennonuniformity in datasets methodologies or products under exami-nation Since our dataset contains information for multiple TV showsthat in principle differ substantially in their attributes we canexamine such cross-product differences within a common setting

Our focus here is only on characterizing the variation between regu-lars and specials we plan to further exploit the product variation inthe dataset in future research on this issue

The rest of the paper is organized as follows We first describethe datasets used since this assists in understanding the structure ofthe model In Section 2 we describe the construction of the datasetand present descriptive statistics on the sample population viewer-ship patterns show characteristics and characteristics of tune-ins InSection 3 we present the model used to estimate the effects oftune-ins and discuss identification issues We discuss the results inSection 4 and their implications for network strategies in Section 5 InSection 6 we discuss issues for further study

2 The Datasets

We use three datasets in this study The first includes data on theviewing choices of about 17000 individuals during one week inNovember 1995 The second describes the attributes of the showsoffered to these individuals by the four leading networks during thisweek The number of tune-ins for each show and the time of theirairing constitute the third data set

Nielsen Media Research maintains a sample of over 5000 house-( )holds nationwide by installing a Nielsen People Meter NPM for

each television set in the household Using 1990 Census data thesample is designed to reflect the demographic composition of viewersnationwide The sample is revised regularly ensuring in particularthat no single household remains in the sample for more than twoyears

The NPM uses a special remote control to record arrivals anddepartures of individual viewers as well as the channel beingwatched on each television set Although the NPM is calibrated for

( )10 For example Batra et al 1995 summarize the variation in estimated returnsacross products examined in prior studies For conflicting results regarding the exis-

( )tence of diminishing returns to advertising see Simon and Arndt 1980 and Rao and( )Miller 1975

The Effectiveness and Targeting of Television Advertising 367

measurements each minute the data set available to Nielsen clientsprovides a record of whether or not each viewer tuned into each ofthe alternatives during each quarter hour

The raw dataset records whether or not an individual waswatching television in each quarter hour and if so her choice ofnetwork An individual who was watching television but did notchoose any network is coded as watching a nonnetwork channelThis might be a cable channel PBS or a local independent channelEach quarter hour is defined as a time slot

We use the data for prime time 800 to 1100 PM for the fiveweekdays starting Monday November 6 1995 Thus we observeviewersrsquo choices in 60 time slots Table I presents the programming of

( )the four major networks ABC CBS NBC and FOX over this timeperiod This study confines itself to east-coast viewers to avoidproblems arising from ABCrsquos Monday night programming ABCfeatures Monday Night Football broadcast live across the countrydepending on local starting and ending times of the football gameABC affiliates across the country fill their Monday night schedulewith a variety of other shows Adjusting for these programmingdifferences by region would unnecessarily complicate this study

Finally viewers who never watched television during weeknightprime time and those younger than six years of age are eliminatedfrom the sample From this group we randomly select 1675 individu-als Their viewing choices provide an adequate and rich set ofinformation that is used in the estimation

( )Most individuals chose not to watch TV 555 in any given( )time slot and many preferred to watch a nonnetwork channel 184

NBC was the most watched network with 89 of the individuals( )tuned in on average in a given time slot followed by ABC 77

( ) ( )CBS 61 and FOX a distant fourth 36 The highest-rated show(during the week under consideration was ER a medical drama on

) 11NBC with a 21 share while the CBS news magazine 48 Hourshad the lowest rating with a 29 share An interesting aspect ofviewing behavior was the persistence in choices of individuals Twoout of any three viewers in any given time slot watched the samechannel in the previous time slot The degree of persistence was evenhigher across time slots spanned by a single show and variedaccording to demographic characteristics12

(11 lsquolsquoSharersquorsquo is defined here to be the fraction of all individuals including those)who do not watch TV who are tuned in to the show in the given time slot

( )12 Shachar and Emerson 1996 examine the phenomenon of persistence in moredetail using the same dataset

Journal of Economics amp Management Strategy368

Day Network 800 830 900 930 1000 1030

Mon ABC The Marshal Pro Football Philadelphia at Dallas

CBS The Nanny Canrsquot HurryLove

Murphy Brown High Society Chicago Hope

NBC Fresh Princeof Bel-Air

In the House Movie She Fought Alone

FOX Melrose Place Beverly Hills 90210 Affiliate Programming News

Tue ABC Roseanne Hudson Street HomeImprovement

Coach NYPD Blue

CBS The Client Movie Nothing Lasts Forever

NBC Wings News Radio Frasier Pursuit ofHappiness

Dateline NBC

FOX Movie Bram Stokerrsquos Dracula Affiliate Programming News

Wed ABC Ellen The DrewCarey Show

Grace UnderFire

The NakedTruth

Prime Time Live

CBS Bless thisHouse

Daversquos World Central Park West Courthouse

NBC Seaquest 2032 Dateline NBC Law amp Order

FOX Beverly Hills 90210 Party of Five Affiliate Programming News

Thu ABC Movie Columbo Itrsquos All in the Game Murder One

CBS Murder She Wrote New York News 48 Hours

NBC Friends The SingleGuy

Seinfeld Caroline inthe City

ER

FOX Living Single The Crew New York Undercover Affiliate Programming News

Fri ABC FamilyMatters

Boy MeetsWorld

Step by Step Hanginrsquo WithMr Cooper

2020

CBS Here Comes the Bride Ice Wars USA vs The World

NBC Unsolved Mysteries Dateline NBC Homicide Life on the Street

FOX Strange Luck X-Files Affiliate Programming News

The purpose of this study is to examine the effects of tune-inson viewing decisions In Section 3 we present the viewing-choicemodel that we use to estimate these effects The structure of this

( )model is similar to that of Shachar and Emerson 1996 which foundthat demographic characteristics of a showrsquos cast and of individuals

The Effectiveness and Targeting of Television Advertising 369

table II

Summary Statistics IndividualDemographic Characteristics

aVariable Mean Std Dev

Kids 00794 02704Teens 00627 02425Gen-X 02400 04272Boom 02764 04474Old 04191 04936Female 05319 04991Male 04681 04991Family 04304 04953Adult 08579 03492Income 08333 02259Educat 07421 02216Urban 04149 04929Basic 03642 04813Premium 03588 04798

a ( )Definitions dummy variables unless otherwise specified lsquolsquoKidsrsquorsquo individu al is between the ages of 7and 11 lsquolsquoTeensrsquorsquo individual is between the ages of 12 and 17 lsquolsquoGen-Xrsquorsquo individu al is between the ages of18 and 34 lsquolsquoBoomrsquorsquo individual is between the ages of 35 and 49 lsquolsquoOldrsquorsquo individu al is age 50 or olderlsquolsquoFemalersquorsquo individual is a female lsquolsquoM alersquorsquo individu al is a male lsquolsquoFamilyrsquorsquo individu al lives in a householdwith a female older than 18 and her kids lsquolsquoAdu ltrsquorsquo individual is older than 18 lsquolsquo Incom ersquorsquo there are sixlevels of incom e on the unit interval lsquolsquoEdu catrsquorsquo there are five categories of education on the unit intervallsquolsquoUrbanrsquorsquo individu al lives in an urban area lsquolsquoBasicrsquorsquo individu al has basic cable lsquolsquoPremiumrsquorsquo individu al haspremium cable

as well as five show attributesmdashaction comedy romance suspenseand fictionmdashare important in explaining viewing decisions We brieflydescribe each of these variables below

Table II defines all the individual demographic variables andpresents their summary statistics Show demographics are describedin Table III In Table IV we present the various attributes for eachshow each of which is normalized to lie between 0 and 1 Theseattributes were subjectively measured by four research assistantswho both watched the entire tapes of the weekrsquos shows and usedpreexisting knowledge about the shows in constructing these mea-sures13

13 For details on the construction of these attribute measures see Shachar and( )Emerson 1996

Journal of Economics amp Management Strategy370

table III

Summary Statistics Cast Demographicsof Shows

Show Cast Mean Std Dev

Gen-X 03438 04787Boom 02813 04532Family 01719 03802Male 04531 05017Female 02500 04364Black 00727 02603

( )Definitions all dummy variables lsquolsquoGen-Xrsquorsquo the main characters in the show are between the ages of 18and 34 lsquolsquoBoomrsquorsquo the main characters in the show are between the ages of 35 and 49 lsquolsquoFamilyrsquorsquo the maincharacters in the show are members of a family lsquolsquoM alersquorsquo the main characters in the show are malelsquolsquoFemalersquorsquo the main characters in the show are female lsquolsquoBlackrsquorsquo the main characters in the show are black

table IV

Show Attributes

Show Network Action Comedy Fiction Romance Suspense

Fresh Prince of Bel-Air NBC 011 100 067 050 020Melrose Place FOX 033 000 067 075 080The Marshal ABC 056 000 067 038 060The Nanny CBS 000 100 067 063 020Canrsquot Hurry Love CBS 000 100 067 088 020In The House NBC 022 100 067 025 020Pro Football ABC 100 014 000 000 100Beverly Hills 90210 FOX 022 043 067 100 060She Fought Alone NBC 067 029 033 075 080Murphy Brown CBS 011 100 067 050 020High Society CBS 000 100 067 038 020Chicago Hope CBS 067 014 033 063 080Roseanne ABC 000 100 067 075 020Bram Stoker rsquos Dracula FOX 067 000 100 063 080Wings NBC 011 100 067 075 020The Client CBS 022 014 033 025 060NewsRadio NBC 000 100 067 038 020Hudson Street ABC 000 100 067 088 020Nothing Lasts Forever CBS 033 000 067 063 080Home Improvement ABC 022 100 067 075 020Frasier NBC 000 100 067 063 020Pursuit of Happiness NBC 000 100 067 088 020Coach ABC 000 100 067 063 020Dateline NBC NBC 022 000 000 000 040NYPD Blue ABC 056 014 033 063 080Bless This House CBS 000 100 067 050 020Ellen ABC 000 100 067 025 020

The Effectiveness and Targeting of Television Advertising 371

table IV( )Continued

Show Network Action Comedy Fiction Romance Suspense

Beverly Hills 90210 FOX 022 043 067 100 100Seaquest 2030 NBC 100 000 100 013 080The Drew Carey Show ABC 011 100 067 000 020Daversquos World CBS 000 100 067 050 020Dateline NBC NBC 011 000 000 000 080Party of Five FOX 000 029 067 100 020Grace Under Fire ABC 000 100 067 038 020Central Park West CBS 022 014 067 075 080The Naked Truth ABC 011 100 067 088 020Law and Order NBC 067 043 033 013 100Courthouse CBS 033 029 067 088 080Prime Time Live ABC 078 014 000 025 080Murder She Wrote CBS 044 014 067 038 080Living Single FOX 000 100 067 075 040Columbo It rsquos All in the Game ABC 044 043 067 075 080Friends NBC 000 100 067 088 060The Crew FOX 000 100 067 063 020The Single Guy NBC 000 100 067 088 020Seinfeld NBC 011 100 067 063 060New York News CBS 056 014 033 050 060New York Undercover FOX 089 029 033 050 100Caroline in the City NBC 000 100 067 100 02048 Hours CBS 022 000 000 025 040ER NBC 100 029 033 050 080Murder One ABC 033 000 033 050 080Strange Luck FOX 078 029 100 050 080Family Matters ABC 022 100 067 050 020Unsolved Mysteries NBC 044 000 033 000 100CBS Friday Night Movie CBS 033 100 000 050 020Boy Meets World ABC 022 100 067 050 020Ice Wars USA vs The World CBS 078 014 000 000 060X-Files FOX 100 029 100 025 100Step by Step ABC 000 100 067 075 020Dateline NBC NBC 022 014 000 025 040Hanginrsquo with Mr Cooper ABC 022 100 067 050 020Homicide Life on the Street NBC 067 029 033 013 10020 r 20 ABC 022 013 000 013 040

The variable Tune In indicates whether there was a tune-injt(advertisement for a show jt ie a show on network j in a given time

)slot t in each time slot during the week Obviously there are notune-ins for a show in any time slot subsequent to when it is aired

Table V presents the shows ordered by their number of tune-ins

Journal of Economics amp Management Strategy372

table V

Show Tune-Ins

Show Network Day Tune-Ins

The Nanny CBS Monday 0The Marshal ABC Monday 0Melrose Place FOX Monday 0Fresh Prince of Bel-Air NBC Monday 0Pro Football ABC Monday 1Home Improvement ABC Tuesday 2Roseanne ABC Tuesday 2Coach ABC Tuesday 2Beverly Hills 90210 FOX Monday 2Family Matters ABC Friday 2Wings NBC Tuesday 2NYPD Blue ABC Tuesday 2X-Files FOX Friday 2Murphy Brown CBS Monday 2Hudson Street ABC Tuesday 2Canrsquot Hurry Love CBS Monday 2In The House NBC Monday 2Chicago Hope CBS Monday 2Ellen ABC Wednesday 3Bram Stoker rsquos Dracula FOX Tuesday 3Dateline NBC NBC Wednesday 3Boy Meets World ABC Friday 3Seaquest 2030 NBC Wednesday 3Step by Step ABC Friday 3Unsolved Mysteries NBC Friday 3Hanginrsquo with Mr Cooper ABC Friday 3Grace Under Fire ABC Wednesday 3High Society CBS Monday 3The Naked Truth ABC Wednesday 3Dateline NBC NBC Friday 3Courthouse CBS Wednesday 4Strange Luck FOX Friday 4NewsRadio NBC Tuesday 4The Client CBS Tuesday 4Homicide Life on the Street NBC Friday 4Frasier NBC Tuesday 4New York Undercover FOX Thursday 4Living Single FOX Thursday 4Law amp Order NBC Wednesday 4She Fought Alone NBC Monday 4The Drew Carey Show ABC Wednesday 4Bless This House CBS Wednesday 4Nothing Lasts Forever CBS Tuesday 5Columbo It rsquos All in the Game ABC Thursday 5Pursuit of Happiness NBC Tuesday 5Dateline NBC NBC Tuesday 5

The Effectiveness and Targeting of Television Advertising 373

table V( )Continued

Show Network Day Tune-Ins

Beverly Hills 90210 FOX Wednesday 5The Crew FOX Thursday 5Central Park West CBS Wednesday 5Murder She Wrote CBS Thursday 6Daversquos World CBS Wednesday 6Party of Five FOX Wednesday 6Prime Time Live ABC Wednesday 6CBS Friday Night Movie CBS Friday 6Seinfeld NBC Thursday 6Friends NBC Thursday 6The Single Guy NBC Thursday 7Ice Wars USA vs The World CBS Friday 7Caroline in the City NBC Thursday 7Murder One ABC Thursday 8New York News CBS Thursday 820 r 20 ABC Friday 8ER NBC Thursday 948 Hours CBS Thursday 10

Since the data contain information only on tune-ins that were airedon prime time starting on Monday it is not surprising that the showson Monday have fewer tune-ins than do shows aired later in theweek Interestingly the three shows with the largest number oftune-ins were aired in the same time-slot Thursday at 1000 PM Thismay indicate the strategic use of tune-ins by networks

The variable Count indicates the number of times that ani jt

individual i was exposed to a tune-in for a show jt This variable wascreated by matching the Nielsen data on individualsrsquo viewing choiceswith the information in Tune In In principle the effect of tune-insjt

can then be estimated by examining the effects of this variable onindividual viewing decisions after controlling for other characteris-tics The resulting estimates will be biased in general however Thefollowing example illustrates the source of this bias

Eight tune-in advertisements for the ABC news magazine 20 r 20aired during the following time slots and shows Monday 1030( ) ( ) (Monday Night Football Tuesday 945 Coach Tuesday 1015 NYPD

) ( ) (Blue Wednesday 915 Grace Under Fire Wednesday 1015 Prime) ( ) (Time Live Thursday 915 Movie Columbo Thursday 1015 Murder

) ( )One and Friday 945 Hanginrsquo with Mr Cooper In Table VI weestimate a probit model to test the hypothesis that individuals who

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 3: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 365

kinds of shows If there were no informational content in advertisingthen the effects of tune-ins should not differ across such shows withdifferent preexisting lsquolsquoinformation stocksrsquorsquo Thus the product varia-tion in the data provides us with a clear way to identify the informa-tional value of advertising6

Our estimates of the effects of tune-ins may be biased sincenetworks generally target their tune-ins for each show towards cer-tain groups of individuals For example tune-ins for comedies aremore often aired during other comedies thus targeting individualsmost likely to watch comedies in the first place If these unobserveddifferences in individual preferences are not controlled for the effectsof tune-ins on viewership will be upward biased We deal explicitlywith this endogeneity problem in the estimation below To ourknowledge no other micro-level study addresses this issue in anydetail7

This is the first study focusing explicitly on the effects of tune-inadvertisements on individual behavior8 There are two main advan-tages of examining the effects of advertising in the TV industry Firstadvertising is undertaken by firms using in general various instru-

( ) (ments price discounts promotions etc and various media televi-)sion billboards magazines etc These different forms of advertising

may be substitutes or complements in consumption9 for example themarginal effectiveness of magazine ads may depend on the amountof advertising generated by other means concurrently or in the pastIn order to accurately estimate the marginal effectiveness of a particu-lar form of advertising or assess the relative efficacy of alternativeforms of advertising one would require data on the amount ofadvertising via other forms this is usually difficult to obtain Thisissue is of less concern in the TV industry for two reasons firstalmost all advertising by networks is in the form of tune-ins secondthe price of TV services is zero from an individualrsquos standpointHence we do not need to consider issues arising from the existenceof multiple advertising inputs

6 A few previous studies attempt to distinguish informative effects from persua-sive effects in advertising either by subjective measurement of the information content

( )in ads Resnik and Stern 1978 or by econometric identification techniques similar to( )ours Ackerberg 1995 All these studies focus on single-product returns of advertising

7 The targeting of advertising may be important in contexts of both repeat andnonrepeat purchase and hence is likely to be an issue of general concern

( ) ( )8 See for example Berndt 1991 or Tellis and Weiss 1995 for surveys of theliterature on the effects of advertising

9 Strictly the advertising itself is not consumed rather ads may convey informa-tion that is of value in making decisions

Journal of Economics amp Management Strategy366

Second previous studies suggest that the returns to advertisingmay differ across products10 These differences are useful in revealingthe different roles of advertising in influencing individual choice

However it is difficult to compare results across studies givennonuniformity in datasets methodologies or products under exami-nation Since our dataset contains information for multiple TV showsthat in principle differ substantially in their attributes we canexamine such cross-product differences within a common setting

Our focus here is only on characterizing the variation between regu-lars and specials we plan to further exploit the product variation inthe dataset in future research on this issue

The rest of the paper is organized as follows We first describethe datasets used since this assists in understanding the structure ofthe model In Section 2 we describe the construction of the datasetand present descriptive statistics on the sample population viewer-ship patterns show characteristics and characteristics of tune-ins InSection 3 we present the model used to estimate the effects oftune-ins and discuss identification issues We discuss the results inSection 4 and their implications for network strategies in Section 5 InSection 6 we discuss issues for further study

2 The Datasets

We use three datasets in this study The first includes data on theviewing choices of about 17000 individuals during one week inNovember 1995 The second describes the attributes of the showsoffered to these individuals by the four leading networks during thisweek The number of tune-ins for each show and the time of theirairing constitute the third data set

Nielsen Media Research maintains a sample of over 5000 house-( )holds nationwide by installing a Nielsen People Meter NPM for

each television set in the household Using 1990 Census data thesample is designed to reflect the demographic composition of viewersnationwide The sample is revised regularly ensuring in particularthat no single household remains in the sample for more than twoyears

The NPM uses a special remote control to record arrivals anddepartures of individual viewers as well as the channel beingwatched on each television set Although the NPM is calibrated for

( )10 For example Batra et al 1995 summarize the variation in estimated returnsacross products examined in prior studies For conflicting results regarding the exis-

( )tence of diminishing returns to advertising see Simon and Arndt 1980 and Rao and( )Miller 1975

The Effectiveness and Targeting of Television Advertising 367

measurements each minute the data set available to Nielsen clientsprovides a record of whether or not each viewer tuned into each ofthe alternatives during each quarter hour

The raw dataset records whether or not an individual waswatching television in each quarter hour and if so her choice ofnetwork An individual who was watching television but did notchoose any network is coded as watching a nonnetwork channelThis might be a cable channel PBS or a local independent channelEach quarter hour is defined as a time slot

We use the data for prime time 800 to 1100 PM for the fiveweekdays starting Monday November 6 1995 Thus we observeviewersrsquo choices in 60 time slots Table I presents the programming of

( )the four major networks ABC CBS NBC and FOX over this timeperiod This study confines itself to east-coast viewers to avoidproblems arising from ABCrsquos Monday night programming ABCfeatures Monday Night Football broadcast live across the countrydepending on local starting and ending times of the football gameABC affiliates across the country fill their Monday night schedulewith a variety of other shows Adjusting for these programmingdifferences by region would unnecessarily complicate this study

Finally viewers who never watched television during weeknightprime time and those younger than six years of age are eliminatedfrom the sample From this group we randomly select 1675 individu-als Their viewing choices provide an adequate and rich set ofinformation that is used in the estimation

( )Most individuals chose not to watch TV 555 in any given( )time slot and many preferred to watch a nonnetwork channel 184

NBC was the most watched network with 89 of the individuals( )tuned in on average in a given time slot followed by ABC 77

( ) ( )CBS 61 and FOX a distant fourth 36 The highest-rated show(during the week under consideration was ER a medical drama on

) 11NBC with a 21 share while the CBS news magazine 48 Hourshad the lowest rating with a 29 share An interesting aspect ofviewing behavior was the persistence in choices of individuals Twoout of any three viewers in any given time slot watched the samechannel in the previous time slot The degree of persistence was evenhigher across time slots spanned by a single show and variedaccording to demographic characteristics12

(11 lsquolsquoSharersquorsquo is defined here to be the fraction of all individuals including those)who do not watch TV who are tuned in to the show in the given time slot

( )12 Shachar and Emerson 1996 examine the phenomenon of persistence in moredetail using the same dataset

Journal of Economics amp Management Strategy368

Day Network 800 830 900 930 1000 1030

Mon ABC The Marshal Pro Football Philadelphia at Dallas

CBS The Nanny Canrsquot HurryLove

Murphy Brown High Society Chicago Hope

NBC Fresh Princeof Bel-Air

In the House Movie She Fought Alone

FOX Melrose Place Beverly Hills 90210 Affiliate Programming News

Tue ABC Roseanne Hudson Street HomeImprovement

Coach NYPD Blue

CBS The Client Movie Nothing Lasts Forever

NBC Wings News Radio Frasier Pursuit ofHappiness

Dateline NBC

FOX Movie Bram Stokerrsquos Dracula Affiliate Programming News

Wed ABC Ellen The DrewCarey Show

Grace UnderFire

The NakedTruth

Prime Time Live

CBS Bless thisHouse

Daversquos World Central Park West Courthouse

NBC Seaquest 2032 Dateline NBC Law amp Order

FOX Beverly Hills 90210 Party of Five Affiliate Programming News

Thu ABC Movie Columbo Itrsquos All in the Game Murder One

CBS Murder She Wrote New York News 48 Hours

NBC Friends The SingleGuy

Seinfeld Caroline inthe City

ER

FOX Living Single The Crew New York Undercover Affiliate Programming News

Fri ABC FamilyMatters

Boy MeetsWorld

Step by Step Hanginrsquo WithMr Cooper

2020

CBS Here Comes the Bride Ice Wars USA vs The World

NBC Unsolved Mysteries Dateline NBC Homicide Life on the Street

FOX Strange Luck X-Files Affiliate Programming News

The purpose of this study is to examine the effects of tune-inson viewing decisions In Section 3 we present the viewing-choicemodel that we use to estimate these effects The structure of this

( )model is similar to that of Shachar and Emerson 1996 which foundthat demographic characteristics of a showrsquos cast and of individuals

The Effectiveness and Targeting of Television Advertising 369

table II

Summary Statistics IndividualDemographic Characteristics

aVariable Mean Std Dev

Kids 00794 02704Teens 00627 02425Gen-X 02400 04272Boom 02764 04474Old 04191 04936Female 05319 04991Male 04681 04991Family 04304 04953Adult 08579 03492Income 08333 02259Educat 07421 02216Urban 04149 04929Basic 03642 04813Premium 03588 04798

a ( )Definitions dummy variables unless otherwise specified lsquolsquoKidsrsquorsquo individu al is between the ages of 7and 11 lsquolsquoTeensrsquorsquo individual is between the ages of 12 and 17 lsquolsquoGen-Xrsquorsquo individu al is between the ages of18 and 34 lsquolsquoBoomrsquorsquo individual is between the ages of 35 and 49 lsquolsquoOldrsquorsquo individu al is age 50 or olderlsquolsquoFemalersquorsquo individual is a female lsquolsquoM alersquorsquo individu al is a male lsquolsquoFamilyrsquorsquo individu al lives in a householdwith a female older than 18 and her kids lsquolsquoAdu ltrsquorsquo individual is older than 18 lsquolsquo Incom ersquorsquo there are sixlevels of incom e on the unit interval lsquolsquoEdu catrsquorsquo there are five categories of education on the unit intervallsquolsquoUrbanrsquorsquo individu al lives in an urban area lsquolsquoBasicrsquorsquo individu al has basic cable lsquolsquoPremiumrsquorsquo individu al haspremium cable

as well as five show attributesmdashaction comedy romance suspenseand fictionmdashare important in explaining viewing decisions We brieflydescribe each of these variables below

Table II defines all the individual demographic variables andpresents their summary statistics Show demographics are describedin Table III In Table IV we present the various attributes for eachshow each of which is normalized to lie between 0 and 1 Theseattributes were subjectively measured by four research assistantswho both watched the entire tapes of the weekrsquos shows and usedpreexisting knowledge about the shows in constructing these mea-sures13

13 For details on the construction of these attribute measures see Shachar and( )Emerson 1996

Journal of Economics amp Management Strategy370

table III

Summary Statistics Cast Demographicsof Shows

Show Cast Mean Std Dev

Gen-X 03438 04787Boom 02813 04532Family 01719 03802Male 04531 05017Female 02500 04364Black 00727 02603

( )Definitions all dummy variables lsquolsquoGen-Xrsquorsquo the main characters in the show are between the ages of 18and 34 lsquolsquoBoomrsquorsquo the main characters in the show are between the ages of 35 and 49 lsquolsquoFamilyrsquorsquo the maincharacters in the show are members of a family lsquolsquoM alersquorsquo the main characters in the show are malelsquolsquoFemalersquorsquo the main characters in the show are female lsquolsquoBlackrsquorsquo the main characters in the show are black

table IV

Show Attributes

Show Network Action Comedy Fiction Romance Suspense

Fresh Prince of Bel-Air NBC 011 100 067 050 020Melrose Place FOX 033 000 067 075 080The Marshal ABC 056 000 067 038 060The Nanny CBS 000 100 067 063 020Canrsquot Hurry Love CBS 000 100 067 088 020In The House NBC 022 100 067 025 020Pro Football ABC 100 014 000 000 100Beverly Hills 90210 FOX 022 043 067 100 060She Fought Alone NBC 067 029 033 075 080Murphy Brown CBS 011 100 067 050 020High Society CBS 000 100 067 038 020Chicago Hope CBS 067 014 033 063 080Roseanne ABC 000 100 067 075 020Bram Stoker rsquos Dracula FOX 067 000 100 063 080Wings NBC 011 100 067 075 020The Client CBS 022 014 033 025 060NewsRadio NBC 000 100 067 038 020Hudson Street ABC 000 100 067 088 020Nothing Lasts Forever CBS 033 000 067 063 080Home Improvement ABC 022 100 067 075 020Frasier NBC 000 100 067 063 020Pursuit of Happiness NBC 000 100 067 088 020Coach ABC 000 100 067 063 020Dateline NBC NBC 022 000 000 000 040NYPD Blue ABC 056 014 033 063 080Bless This House CBS 000 100 067 050 020Ellen ABC 000 100 067 025 020

The Effectiveness and Targeting of Television Advertising 371

table IV( )Continued

Show Network Action Comedy Fiction Romance Suspense

Beverly Hills 90210 FOX 022 043 067 100 100Seaquest 2030 NBC 100 000 100 013 080The Drew Carey Show ABC 011 100 067 000 020Daversquos World CBS 000 100 067 050 020Dateline NBC NBC 011 000 000 000 080Party of Five FOX 000 029 067 100 020Grace Under Fire ABC 000 100 067 038 020Central Park West CBS 022 014 067 075 080The Naked Truth ABC 011 100 067 088 020Law and Order NBC 067 043 033 013 100Courthouse CBS 033 029 067 088 080Prime Time Live ABC 078 014 000 025 080Murder She Wrote CBS 044 014 067 038 080Living Single FOX 000 100 067 075 040Columbo It rsquos All in the Game ABC 044 043 067 075 080Friends NBC 000 100 067 088 060The Crew FOX 000 100 067 063 020The Single Guy NBC 000 100 067 088 020Seinfeld NBC 011 100 067 063 060New York News CBS 056 014 033 050 060New York Undercover FOX 089 029 033 050 100Caroline in the City NBC 000 100 067 100 02048 Hours CBS 022 000 000 025 040ER NBC 100 029 033 050 080Murder One ABC 033 000 033 050 080Strange Luck FOX 078 029 100 050 080Family Matters ABC 022 100 067 050 020Unsolved Mysteries NBC 044 000 033 000 100CBS Friday Night Movie CBS 033 100 000 050 020Boy Meets World ABC 022 100 067 050 020Ice Wars USA vs The World CBS 078 014 000 000 060X-Files FOX 100 029 100 025 100Step by Step ABC 000 100 067 075 020Dateline NBC NBC 022 014 000 025 040Hanginrsquo with Mr Cooper ABC 022 100 067 050 020Homicide Life on the Street NBC 067 029 033 013 10020 r 20 ABC 022 013 000 013 040

The variable Tune In indicates whether there was a tune-injt(advertisement for a show jt ie a show on network j in a given time

)slot t in each time slot during the week Obviously there are notune-ins for a show in any time slot subsequent to when it is aired

Table V presents the shows ordered by their number of tune-ins

Journal of Economics amp Management Strategy372

table V

Show Tune-Ins

Show Network Day Tune-Ins

The Nanny CBS Monday 0The Marshal ABC Monday 0Melrose Place FOX Monday 0Fresh Prince of Bel-Air NBC Monday 0Pro Football ABC Monday 1Home Improvement ABC Tuesday 2Roseanne ABC Tuesday 2Coach ABC Tuesday 2Beverly Hills 90210 FOX Monday 2Family Matters ABC Friday 2Wings NBC Tuesday 2NYPD Blue ABC Tuesday 2X-Files FOX Friday 2Murphy Brown CBS Monday 2Hudson Street ABC Tuesday 2Canrsquot Hurry Love CBS Monday 2In The House NBC Monday 2Chicago Hope CBS Monday 2Ellen ABC Wednesday 3Bram Stoker rsquos Dracula FOX Tuesday 3Dateline NBC NBC Wednesday 3Boy Meets World ABC Friday 3Seaquest 2030 NBC Wednesday 3Step by Step ABC Friday 3Unsolved Mysteries NBC Friday 3Hanginrsquo with Mr Cooper ABC Friday 3Grace Under Fire ABC Wednesday 3High Society CBS Monday 3The Naked Truth ABC Wednesday 3Dateline NBC NBC Friday 3Courthouse CBS Wednesday 4Strange Luck FOX Friday 4NewsRadio NBC Tuesday 4The Client CBS Tuesday 4Homicide Life on the Street NBC Friday 4Frasier NBC Tuesday 4New York Undercover FOX Thursday 4Living Single FOX Thursday 4Law amp Order NBC Wednesday 4She Fought Alone NBC Monday 4The Drew Carey Show ABC Wednesday 4Bless This House CBS Wednesday 4Nothing Lasts Forever CBS Tuesday 5Columbo It rsquos All in the Game ABC Thursday 5Pursuit of Happiness NBC Tuesday 5Dateline NBC NBC Tuesday 5

The Effectiveness and Targeting of Television Advertising 373

table V( )Continued

Show Network Day Tune-Ins

Beverly Hills 90210 FOX Wednesday 5The Crew FOX Thursday 5Central Park West CBS Wednesday 5Murder She Wrote CBS Thursday 6Daversquos World CBS Wednesday 6Party of Five FOX Wednesday 6Prime Time Live ABC Wednesday 6CBS Friday Night Movie CBS Friday 6Seinfeld NBC Thursday 6Friends NBC Thursday 6The Single Guy NBC Thursday 7Ice Wars USA vs The World CBS Friday 7Caroline in the City NBC Thursday 7Murder One ABC Thursday 8New York News CBS Thursday 820 r 20 ABC Friday 8ER NBC Thursday 948 Hours CBS Thursday 10

Since the data contain information only on tune-ins that were airedon prime time starting on Monday it is not surprising that the showson Monday have fewer tune-ins than do shows aired later in theweek Interestingly the three shows with the largest number oftune-ins were aired in the same time-slot Thursday at 1000 PM Thismay indicate the strategic use of tune-ins by networks

The variable Count indicates the number of times that ani jt

individual i was exposed to a tune-in for a show jt This variable wascreated by matching the Nielsen data on individualsrsquo viewing choiceswith the information in Tune In In principle the effect of tune-insjt

can then be estimated by examining the effects of this variable onindividual viewing decisions after controlling for other characteris-tics The resulting estimates will be biased in general however Thefollowing example illustrates the source of this bias

Eight tune-in advertisements for the ABC news magazine 20 r 20aired during the following time slots and shows Monday 1030( ) ( ) (Monday Night Football Tuesday 945 Coach Tuesday 1015 NYPD

) ( ) (Blue Wednesday 915 Grace Under Fire Wednesday 1015 Prime) ( ) (Time Live Thursday 915 Movie Columbo Thursday 1015 Murder

) ( )One and Friday 945 Hanginrsquo with Mr Cooper In Table VI weestimate a probit model to test the hypothesis that individuals who

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 4: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy366

Second previous studies suggest that the returns to advertisingmay differ across products10 These differences are useful in revealingthe different roles of advertising in influencing individual choice

However it is difficult to compare results across studies givennonuniformity in datasets methodologies or products under exami-nation Since our dataset contains information for multiple TV showsthat in principle differ substantially in their attributes we canexamine such cross-product differences within a common setting

Our focus here is only on characterizing the variation between regu-lars and specials we plan to further exploit the product variation inthe dataset in future research on this issue

The rest of the paper is organized as follows We first describethe datasets used since this assists in understanding the structure ofthe model In Section 2 we describe the construction of the datasetand present descriptive statistics on the sample population viewer-ship patterns show characteristics and characteristics of tune-ins InSection 3 we present the model used to estimate the effects oftune-ins and discuss identification issues We discuss the results inSection 4 and their implications for network strategies in Section 5 InSection 6 we discuss issues for further study

2 The Datasets

We use three datasets in this study The first includes data on theviewing choices of about 17000 individuals during one week inNovember 1995 The second describes the attributes of the showsoffered to these individuals by the four leading networks during thisweek The number of tune-ins for each show and the time of theirairing constitute the third data set

Nielsen Media Research maintains a sample of over 5000 house-( )holds nationwide by installing a Nielsen People Meter NPM for

each television set in the household Using 1990 Census data thesample is designed to reflect the demographic composition of viewersnationwide The sample is revised regularly ensuring in particularthat no single household remains in the sample for more than twoyears

The NPM uses a special remote control to record arrivals anddepartures of individual viewers as well as the channel beingwatched on each television set Although the NPM is calibrated for

( )10 For example Batra et al 1995 summarize the variation in estimated returnsacross products examined in prior studies For conflicting results regarding the exis-

( )tence of diminishing returns to advertising see Simon and Arndt 1980 and Rao and( )Miller 1975

The Effectiveness and Targeting of Television Advertising 367

measurements each minute the data set available to Nielsen clientsprovides a record of whether or not each viewer tuned into each ofthe alternatives during each quarter hour

The raw dataset records whether or not an individual waswatching television in each quarter hour and if so her choice ofnetwork An individual who was watching television but did notchoose any network is coded as watching a nonnetwork channelThis might be a cable channel PBS or a local independent channelEach quarter hour is defined as a time slot

We use the data for prime time 800 to 1100 PM for the fiveweekdays starting Monday November 6 1995 Thus we observeviewersrsquo choices in 60 time slots Table I presents the programming of

( )the four major networks ABC CBS NBC and FOX over this timeperiod This study confines itself to east-coast viewers to avoidproblems arising from ABCrsquos Monday night programming ABCfeatures Monday Night Football broadcast live across the countrydepending on local starting and ending times of the football gameABC affiliates across the country fill their Monday night schedulewith a variety of other shows Adjusting for these programmingdifferences by region would unnecessarily complicate this study

Finally viewers who never watched television during weeknightprime time and those younger than six years of age are eliminatedfrom the sample From this group we randomly select 1675 individu-als Their viewing choices provide an adequate and rich set ofinformation that is used in the estimation

( )Most individuals chose not to watch TV 555 in any given( )time slot and many preferred to watch a nonnetwork channel 184

NBC was the most watched network with 89 of the individuals( )tuned in on average in a given time slot followed by ABC 77

( ) ( )CBS 61 and FOX a distant fourth 36 The highest-rated show(during the week under consideration was ER a medical drama on

) 11NBC with a 21 share while the CBS news magazine 48 Hourshad the lowest rating with a 29 share An interesting aspect ofviewing behavior was the persistence in choices of individuals Twoout of any three viewers in any given time slot watched the samechannel in the previous time slot The degree of persistence was evenhigher across time slots spanned by a single show and variedaccording to demographic characteristics12

(11 lsquolsquoSharersquorsquo is defined here to be the fraction of all individuals including those)who do not watch TV who are tuned in to the show in the given time slot

( )12 Shachar and Emerson 1996 examine the phenomenon of persistence in moredetail using the same dataset

Journal of Economics amp Management Strategy368

Day Network 800 830 900 930 1000 1030

Mon ABC The Marshal Pro Football Philadelphia at Dallas

CBS The Nanny Canrsquot HurryLove

Murphy Brown High Society Chicago Hope

NBC Fresh Princeof Bel-Air

In the House Movie She Fought Alone

FOX Melrose Place Beverly Hills 90210 Affiliate Programming News

Tue ABC Roseanne Hudson Street HomeImprovement

Coach NYPD Blue

CBS The Client Movie Nothing Lasts Forever

NBC Wings News Radio Frasier Pursuit ofHappiness

Dateline NBC

FOX Movie Bram Stokerrsquos Dracula Affiliate Programming News

Wed ABC Ellen The DrewCarey Show

Grace UnderFire

The NakedTruth

Prime Time Live

CBS Bless thisHouse

Daversquos World Central Park West Courthouse

NBC Seaquest 2032 Dateline NBC Law amp Order

FOX Beverly Hills 90210 Party of Five Affiliate Programming News

Thu ABC Movie Columbo Itrsquos All in the Game Murder One

CBS Murder She Wrote New York News 48 Hours

NBC Friends The SingleGuy

Seinfeld Caroline inthe City

ER

FOX Living Single The Crew New York Undercover Affiliate Programming News

Fri ABC FamilyMatters

Boy MeetsWorld

Step by Step Hanginrsquo WithMr Cooper

2020

CBS Here Comes the Bride Ice Wars USA vs The World

NBC Unsolved Mysteries Dateline NBC Homicide Life on the Street

FOX Strange Luck X-Files Affiliate Programming News

The purpose of this study is to examine the effects of tune-inson viewing decisions In Section 3 we present the viewing-choicemodel that we use to estimate these effects The structure of this

( )model is similar to that of Shachar and Emerson 1996 which foundthat demographic characteristics of a showrsquos cast and of individuals

The Effectiveness and Targeting of Television Advertising 369

table II

Summary Statistics IndividualDemographic Characteristics

aVariable Mean Std Dev

Kids 00794 02704Teens 00627 02425Gen-X 02400 04272Boom 02764 04474Old 04191 04936Female 05319 04991Male 04681 04991Family 04304 04953Adult 08579 03492Income 08333 02259Educat 07421 02216Urban 04149 04929Basic 03642 04813Premium 03588 04798

a ( )Definitions dummy variables unless otherwise specified lsquolsquoKidsrsquorsquo individu al is between the ages of 7and 11 lsquolsquoTeensrsquorsquo individual is between the ages of 12 and 17 lsquolsquoGen-Xrsquorsquo individu al is between the ages of18 and 34 lsquolsquoBoomrsquorsquo individual is between the ages of 35 and 49 lsquolsquoOldrsquorsquo individu al is age 50 or olderlsquolsquoFemalersquorsquo individual is a female lsquolsquoM alersquorsquo individu al is a male lsquolsquoFamilyrsquorsquo individu al lives in a householdwith a female older than 18 and her kids lsquolsquoAdu ltrsquorsquo individual is older than 18 lsquolsquo Incom ersquorsquo there are sixlevels of incom e on the unit interval lsquolsquoEdu catrsquorsquo there are five categories of education on the unit intervallsquolsquoUrbanrsquorsquo individu al lives in an urban area lsquolsquoBasicrsquorsquo individu al has basic cable lsquolsquoPremiumrsquorsquo individu al haspremium cable

as well as five show attributesmdashaction comedy romance suspenseand fictionmdashare important in explaining viewing decisions We brieflydescribe each of these variables below

Table II defines all the individual demographic variables andpresents their summary statistics Show demographics are describedin Table III In Table IV we present the various attributes for eachshow each of which is normalized to lie between 0 and 1 Theseattributes were subjectively measured by four research assistantswho both watched the entire tapes of the weekrsquos shows and usedpreexisting knowledge about the shows in constructing these mea-sures13

13 For details on the construction of these attribute measures see Shachar and( )Emerson 1996

Journal of Economics amp Management Strategy370

table III

Summary Statistics Cast Demographicsof Shows

Show Cast Mean Std Dev

Gen-X 03438 04787Boom 02813 04532Family 01719 03802Male 04531 05017Female 02500 04364Black 00727 02603

( )Definitions all dummy variables lsquolsquoGen-Xrsquorsquo the main characters in the show are between the ages of 18and 34 lsquolsquoBoomrsquorsquo the main characters in the show are between the ages of 35 and 49 lsquolsquoFamilyrsquorsquo the maincharacters in the show are members of a family lsquolsquoM alersquorsquo the main characters in the show are malelsquolsquoFemalersquorsquo the main characters in the show are female lsquolsquoBlackrsquorsquo the main characters in the show are black

table IV

Show Attributes

Show Network Action Comedy Fiction Romance Suspense

Fresh Prince of Bel-Air NBC 011 100 067 050 020Melrose Place FOX 033 000 067 075 080The Marshal ABC 056 000 067 038 060The Nanny CBS 000 100 067 063 020Canrsquot Hurry Love CBS 000 100 067 088 020In The House NBC 022 100 067 025 020Pro Football ABC 100 014 000 000 100Beverly Hills 90210 FOX 022 043 067 100 060She Fought Alone NBC 067 029 033 075 080Murphy Brown CBS 011 100 067 050 020High Society CBS 000 100 067 038 020Chicago Hope CBS 067 014 033 063 080Roseanne ABC 000 100 067 075 020Bram Stoker rsquos Dracula FOX 067 000 100 063 080Wings NBC 011 100 067 075 020The Client CBS 022 014 033 025 060NewsRadio NBC 000 100 067 038 020Hudson Street ABC 000 100 067 088 020Nothing Lasts Forever CBS 033 000 067 063 080Home Improvement ABC 022 100 067 075 020Frasier NBC 000 100 067 063 020Pursuit of Happiness NBC 000 100 067 088 020Coach ABC 000 100 067 063 020Dateline NBC NBC 022 000 000 000 040NYPD Blue ABC 056 014 033 063 080Bless This House CBS 000 100 067 050 020Ellen ABC 000 100 067 025 020

The Effectiveness and Targeting of Television Advertising 371

table IV( )Continued

Show Network Action Comedy Fiction Romance Suspense

Beverly Hills 90210 FOX 022 043 067 100 100Seaquest 2030 NBC 100 000 100 013 080The Drew Carey Show ABC 011 100 067 000 020Daversquos World CBS 000 100 067 050 020Dateline NBC NBC 011 000 000 000 080Party of Five FOX 000 029 067 100 020Grace Under Fire ABC 000 100 067 038 020Central Park West CBS 022 014 067 075 080The Naked Truth ABC 011 100 067 088 020Law and Order NBC 067 043 033 013 100Courthouse CBS 033 029 067 088 080Prime Time Live ABC 078 014 000 025 080Murder She Wrote CBS 044 014 067 038 080Living Single FOX 000 100 067 075 040Columbo It rsquos All in the Game ABC 044 043 067 075 080Friends NBC 000 100 067 088 060The Crew FOX 000 100 067 063 020The Single Guy NBC 000 100 067 088 020Seinfeld NBC 011 100 067 063 060New York News CBS 056 014 033 050 060New York Undercover FOX 089 029 033 050 100Caroline in the City NBC 000 100 067 100 02048 Hours CBS 022 000 000 025 040ER NBC 100 029 033 050 080Murder One ABC 033 000 033 050 080Strange Luck FOX 078 029 100 050 080Family Matters ABC 022 100 067 050 020Unsolved Mysteries NBC 044 000 033 000 100CBS Friday Night Movie CBS 033 100 000 050 020Boy Meets World ABC 022 100 067 050 020Ice Wars USA vs The World CBS 078 014 000 000 060X-Files FOX 100 029 100 025 100Step by Step ABC 000 100 067 075 020Dateline NBC NBC 022 014 000 025 040Hanginrsquo with Mr Cooper ABC 022 100 067 050 020Homicide Life on the Street NBC 067 029 033 013 10020 r 20 ABC 022 013 000 013 040

The variable Tune In indicates whether there was a tune-injt(advertisement for a show jt ie a show on network j in a given time

)slot t in each time slot during the week Obviously there are notune-ins for a show in any time slot subsequent to when it is aired

Table V presents the shows ordered by their number of tune-ins

Journal of Economics amp Management Strategy372

table V

Show Tune-Ins

Show Network Day Tune-Ins

The Nanny CBS Monday 0The Marshal ABC Monday 0Melrose Place FOX Monday 0Fresh Prince of Bel-Air NBC Monday 0Pro Football ABC Monday 1Home Improvement ABC Tuesday 2Roseanne ABC Tuesday 2Coach ABC Tuesday 2Beverly Hills 90210 FOX Monday 2Family Matters ABC Friday 2Wings NBC Tuesday 2NYPD Blue ABC Tuesday 2X-Files FOX Friday 2Murphy Brown CBS Monday 2Hudson Street ABC Tuesday 2Canrsquot Hurry Love CBS Monday 2In The House NBC Monday 2Chicago Hope CBS Monday 2Ellen ABC Wednesday 3Bram Stoker rsquos Dracula FOX Tuesday 3Dateline NBC NBC Wednesday 3Boy Meets World ABC Friday 3Seaquest 2030 NBC Wednesday 3Step by Step ABC Friday 3Unsolved Mysteries NBC Friday 3Hanginrsquo with Mr Cooper ABC Friday 3Grace Under Fire ABC Wednesday 3High Society CBS Monday 3The Naked Truth ABC Wednesday 3Dateline NBC NBC Friday 3Courthouse CBS Wednesday 4Strange Luck FOX Friday 4NewsRadio NBC Tuesday 4The Client CBS Tuesday 4Homicide Life on the Street NBC Friday 4Frasier NBC Tuesday 4New York Undercover FOX Thursday 4Living Single FOX Thursday 4Law amp Order NBC Wednesday 4She Fought Alone NBC Monday 4The Drew Carey Show ABC Wednesday 4Bless This House CBS Wednesday 4Nothing Lasts Forever CBS Tuesday 5Columbo It rsquos All in the Game ABC Thursday 5Pursuit of Happiness NBC Tuesday 5Dateline NBC NBC Tuesday 5

The Effectiveness and Targeting of Television Advertising 373

table V( )Continued

Show Network Day Tune-Ins

Beverly Hills 90210 FOX Wednesday 5The Crew FOX Thursday 5Central Park West CBS Wednesday 5Murder She Wrote CBS Thursday 6Daversquos World CBS Wednesday 6Party of Five FOX Wednesday 6Prime Time Live ABC Wednesday 6CBS Friday Night Movie CBS Friday 6Seinfeld NBC Thursday 6Friends NBC Thursday 6The Single Guy NBC Thursday 7Ice Wars USA vs The World CBS Friday 7Caroline in the City NBC Thursday 7Murder One ABC Thursday 8New York News CBS Thursday 820 r 20 ABC Friday 8ER NBC Thursday 948 Hours CBS Thursday 10

Since the data contain information only on tune-ins that were airedon prime time starting on Monday it is not surprising that the showson Monday have fewer tune-ins than do shows aired later in theweek Interestingly the three shows with the largest number oftune-ins were aired in the same time-slot Thursday at 1000 PM Thismay indicate the strategic use of tune-ins by networks

The variable Count indicates the number of times that ani jt

individual i was exposed to a tune-in for a show jt This variable wascreated by matching the Nielsen data on individualsrsquo viewing choiceswith the information in Tune In In principle the effect of tune-insjt

can then be estimated by examining the effects of this variable onindividual viewing decisions after controlling for other characteris-tics The resulting estimates will be biased in general however Thefollowing example illustrates the source of this bias

Eight tune-in advertisements for the ABC news magazine 20 r 20aired during the following time slots and shows Monday 1030( ) ( ) (Monday Night Football Tuesday 945 Coach Tuesday 1015 NYPD

) ( ) (Blue Wednesday 915 Grace Under Fire Wednesday 1015 Prime) ( ) (Time Live Thursday 915 Movie Columbo Thursday 1015 Murder

) ( )One and Friday 945 Hanginrsquo with Mr Cooper In Table VI weestimate a probit model to test the hypothesis that individuals who

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 5: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 367

measurements each minute the data set available to Nielsen clientsprovides a record of whether or not each viewer tuned into each ofthe alternatives during each quarter hour

The raw dataset records whether or not an individual waswatching television in each quarter hour and if so her choice ofnetwork An individual who was watching television but did notchoose any network is coded as watching a nonnetwork channelThis might be a cable channel PBS or a local independent channelEach quarter hour is defined as a time slot

We use the data for prime time 800 to 1100 PM for the fiveweekdays starting Monday November 6 1995 Thus we observeviewersrsquo choices in 60 time slots Table I presents the programming of

( )the four major networks ABC CBS NBC and FOX over this timeperiod This study confines itself to east-coast viewers to avoidproblems arising from ABCrsquos Monday night programming ABCfeatures Monday Night Football broadcast live across the countrydepending on local starting and ending times of the football gameABC affiliates across the country fill their Monday night schedulewith a variety of other shows Adjusting for these programmingdifferences by region would unnecessarily complicate this study

Finally viewers who never watched television during weeknightprime time and those younger than six years of age are eliminatedfrom the sample From this group we randomly select 1675 individu-als Their viewing choices provide an adequate and rich set ofinformation that is used in the estimation

( )Most individuals chose not to watch TV 555 in any given( )time slot and many preferred to watch a nonnetwork channel 184

NBC was the most watched network with 89 of the individuals( )tuned in on average in a given time slot followed by ABC 77

( ) ( )CBS 61 and FOX a distant fourth 36 The highest-rated show(during the week under consideration was ER a medical drama on

) 11NBC with a 21 share while the CBS news magazine 48 Hourshad the lowest rating with a 29 share An interesting aspect ofviewing behavior was the persistence in choices of individuals Twoout of any three viewers in any given time slot watched the samechannel in the previous time slot The degree of persistence was evenhigher across time slots spanned by a single show and variedaccording to demographic characteristics12

(11 lsquolsquoSharersquorsquo is defined here to be the fraction of all individuals including those)who do not watch TV who are tuned in to the show in the given time slot

( )12 Shachar and Emerson 1996 examine the phenomenon of persistence in moredetail using the same dataset

Journal of Economics amp Management Strategy368

Day Network 800 830 900 930 1000 1030

Mon ABC The Marshal Pro Football Philadelphia at Dallas

CBS The Nanny Canrsquot HurryLove

Murphy Brown High Society Chicago Hope

NBC Fresh Princeof Bel-Air

In the House Movie She Fought Alone

FOX Melrose Place Beverly Hills 90210 Affiliate Programming News

Tue ABC Roseanne Hudson Street HomeImprovement

Coach NYPD Blue

CBS The Client Movie Nothing Lasts Forever

NBC Wings News Radio Frasier Pursuit ofHappiness

Dateline NBC

FOX Movie Bram Stokerrsquos Dracula Affiliate Programming News

Wed ABC Ellen The DrewCarey Show

Grace UnderFire

The NakedTruth

Prime Time Live

CBS Bless thisHouse

Daversquos World Central Park West Courthouse

NBC Seaquest 2032 Dateline NBC Law amp Order

FOX Beverly Hills 90210 Party of Five Affiliate Programming News

Thu ABC Movie Columbo Itrsquos All in the Game Murder One

CBS Murder She Wrote New York News 48 Hours

NBC Friends The SingleGuy

Seinfeld Caroline inthe City

ER

FOX Living Single The Crew New York Undercover Affiliate Programming News

Fri ABC FamilyMatters

Boy MeetsWorld

Step by Step Hanginrsquo WithMr Cooper

2020

CBS Here Comes the Bride Ice Wars USA vs The World

NBC Unsolved Mysteries Dateline NBC Homicide Life on the Street

FOX Strange Luck X-Files Affiliate Programming News

The purpose of this study is to examine the effects of tune-inson viewing decisions In Section 3 we present the viewing-choicemodel that we use to estimate these effects The structure of this

( )model is similar to that of Shachar and Emerson 1996 which foundthat demographic characteristics of a showrsquos cast and of individuals

The Effectiveness and Targeting of Television Advertising 369

table II

Summary Statistics IndividualDemographic Characteristics

aVariable Mean Std Dev

Kids 00794 02704Teens 00627 02425Gen-X 02400 04272Boom 02764 04474Old 04191 04936Female 05319 04991Male 04681 04991Family 04304 04953Adult 08579 03492Income 08333 02259Educat 07421 02216Urban 04149 04929Basic 03642 04813Premium 03588 04798

a ( )Definitions dummy variables unless otherwise specified lsquolsquoKidsrsquorsquo individu al is between the ages of 7and 11 lsquolsquoTeensrsquorsquo individual is between the ages of 12 and 17 lsquolsquoGen-Xrsquorsquo individu al is between the ages of18 and 34 lsquolsquoBoomrsquorsquo individual is between the ages of 35 and 49 lsquolsquoOldrsquorsquo individu al is age 50 or olderlsquolsquoFemalersquorsquo individual is a female lsquolsquoM alersquorsquo individu al is a male lsquolsquoFamilyrsquorsquo individu al lives in a householdwith a female older than 18 and her kids lsquolsquoAdu ltrsquorsquo individual is older than 18 lsquolsquo Incom ersquorsquo there are sixlevels of incom e on the unit interval lsquolsquoEdu catrsquorsquo there are five categories of education on the unit intervallsquolsquoUrbanrsquorsquo individu al lives in an urban area lsquolsquoBasicrsquorsquo individu al has basic cable lsquolsquoPremiumrsquorsquo individu al haspremium cable

as well as five show attributesmdashaction comedy romance suspenseand fictionmdashare important in explaining viewing decisions We brieflydescribe each of these variables below

Table II defines all the individual demographic variables andpresents their summary statistics Show demographics are describedin Table III In Table IV we present the various attributes for eachshow each of which is normalized to lie between 0 and 1 Theseattributes were subjectively measured by four research assistantswho both watched the entire tapes of the weekrsquos shows and usedpreexisting knowledge about the shows in constructing these mea-sures13

13 For details on the construction of these attribute measures see Shachar and( )Emerson 1996

Journal of Economics amp Management Strategy370

table III

Summary Statistics Cast Demographicsof Shows

Show Cast Mean Std Dev

Gen-X 03438 04787Boom 02813 04532Family 01719 03802Male 04531 05017Female 02500 04364Black 00727 02603

( )Definitions all dummy variables lsquolsquoGen-Xrsquorsquo the main characters in the show are between the ages of 18and 34 lsquolsquoBoomrsquorsquo the main characters in the show are between the ages of 35 and 49 lsquolsquoFamilyrsquorsquo the maincharacters in the show are members of a family lsquolsquoM alersquorsquo the main characters in the show are malelsquolsquoFemalersquorsquo the main characters in the show are female lsquolsquoBlackrsquorsquo the main characters in the show are black

table IV

Show Attributes

Show Network Action Comedy Fiction Romance Suspense

Fresh Prince of Bel-Air NBC 011 100 067 050 020Melrose Place FOX 033 000 067 075 080The Marshal ABC 056 000 067 038 060The Nanny CBS 000 100 067 063 020Canrsquot Hurry Love CBS 000 100 067 088 020In The House NBC 022 100 067 025 020Pro Football ABC 100 014 000 000 100Beverly Hills 90210 FOX 022 043 067 100 060She Fought Alone NBC 067 029 033 075 080Murphy Brown CBS 011 100 067 050 020High Society CBS 000 100 067 038 020Chicago Hope CBS 067 014 033 063 080Roseanne ABC 000 100 067 075 020Bram Stoker rsquos Dracula FOX 067 000 100 063 080Wings NBC 011 100 067 075 020The Client CBS 022 014 033 025 060NewsRadio NBC 000 100 067 038 020Hudson Street ABC 000 100 067 088 020Nothing Lasts Forever CBS 033 000 067 063 080Home Improvement ABC 022 100 067 075 020Frasier NBC 000 100 067 063 020Pursuit of Happiness NBC 000 100 067 088 020Coach ABC 000 100 067 063 020Dateline NBC NBC 022 000 000 000 040NYPD Blue ABC 056 014 033 063 080Bless This House CBS 000 100 067 050 020Ellen ABC 000 100 067 025 020

The Effectiveness and Targeting of Television Advertising 371

table IV( )Continued

Show Network Action Comedy Fiction Romance Suspense

Beverly Hills 90210 FOX 022 043 067 100 100Seaquest 2030 NBC 100 000 100 013 080The Drew Carey Show ABC 011 100 067 000 020Daversquos World CBS 000 100 067 050 020Dateline NBC NBC 011 000 000 000 080Party of Five FOX 000 029 067 100 020Grace Under Fire ABC 000 100 067 038 020Central Park West CBS 022 014 067 075 080The Naked Truth ABC 011 100 067 088 020Law and Order NBC 067 043 033 013 100Courthouse CBS 033 029 067 088 080Prime Time Live ABC 078 014 000 025 080Murder She Wrote CBS 044 014 067 038 080Living Single FOX 000 100 067 075 040Columbo It rsquos All in the Game ABC 044 043 067 075 080Friends NBC 000 100 067 088 060The Crew FOX 000 100 067 063 020The Single Guy NBC 000 100 067 088 020Seinfeld NBC 011 100 067 063 060New York News CBS 056 014 033 050 060New York Undercover FOX 089 029 033 050 100Caroline in the City NBC 000 100 067 100 02048 Hours CBS 022 000 000 025 040ER NBC 100 029 033 050 080Murder One ABC 033 000 033 050 080Strange Luck FOX 078 029 100 050 080Family Matters ABC 022 100 067 050 020Unsolved Mysteries NBC 044 000 033 000 100CBS Friday Night Movie CBS 033 100 000 050 020Boy Meets World ABC 022 100 067 050 020Ice Wars USA vs The World CBS 078 014 000 000 060X-Files FOX 100 029 100 025 100Step by Step ABC 000 100 067 075 020Dateline NBC NBC 022 014 000 025 040Hanginrsquo with Mr Cooper ABC 022 100 067 050 020Homicide Life on the Street NBC 067 029 033 013 10020 r 20 ABC 022 013 000 013 040

The variable Tune In indicates whether there was a tune-injt(advertisement for a show jt ie a show on network j in a given time

)slot t in each time slot during the week Obviously there are notune-ins for a show in any time slot subsequent to when it is aired

Table V presents the shows ordered by their number of tune-ins

Journal of Economics amp Management Strategy372

table V

Show Tune-Ins

Show Network Day Tune-Ins

The Nanny CBS Monday 0The Marshal ABC Monday 0Melrose Place FOX Monday 0Fresh Prince of Bel-Air NBC Monday 0Pro Football ABC Monday 1Home Improvement ABC Tuesday 2Roseanne ABC Tuesday 2Coach ABC Tuesday 2Beverly Hills 90210 FOX Monday 2Family Matters ABC Friday 2Wings NBC Tuesday 2NYPD Blue ABC Tuesday 2X-Files FOX Friday 2Murphy Brown CBS Monday 2Hudson Street ABC Tuesday 2Canrsquot Hurry Love CBS Monday 2In The House NBC Monday 2Chicago Hope CBS Monday 2Ellen ABC Wednesday 3Bram Stoker rsquos Dracula FOX Tuesday 3Dateline NBC NBC Wednesday 3Boy Meets World ABC Friday 3Seaquest 2030 NBC Wednesday 3Step by Step ABC Friday 3Unsolved Mysteries NBC Friday 3Hanginrsquo with Mr Cooper ABC Friday 3Grace Under Fire ABC Wednesday 3High Society CBS Monday 3The Naked Truth ABC Wednesday 3Dateline NBC NBC Friday 3Courthouse CBS Wednesday 4Strange Luck FOX Friday 4NewsRadio NBC Tuesday 4The Client CBS Tuesday 4Homicide Life on the Street NBC Friday 4Frasier NBC Tuesday 4New York Undercover FOX Thursday 4Living Single FOX Thursday 4Law amp Order NBC Wednesday 4She Fought Alone NBC Monday 4The Drew Carey Show ABC Wednesday 4Bless This House CBS Wednesday 4Nothing Lasts Forever CBS Tuesday 5Columbo It rsquos All in the Game ABC Thursday 5Pursuit of Happiness NBC Tuesday 5Dateline NBC NBC Tuesday 5

The Effectiveness and Targeting of Television Advertising 373

table V( )Continued

Show Network Day Tune-Ins

Beverly Hills 90210 FOX Wednesday 5The Crew FOX Thursday 5Central Park West CBS Wednesday 5Murder She Wrote CBS Thursday 6Daversquos World CBS Wednesday 6Party of Five FOX Wednesday 6Prime Time Live ABC Wednesday 6CBS Friday Night Movie CBS Friday 6Seinfeld NBC Thursday 6Friends NBC Thursday 6The Single Guy NBC Thursday 7Ice Wars USA vs The World CBS Friday 7Caroline in the City NBC Thursday 7Murder One ABC Thursday 8New York News CBS Thursday 820 r 20 ABC Friday 8ER NBC Thursday 948 Hours CBS Thursday 10

Since the data contain information only on tune-ins that were airedon prime time starting on Monday it is not surprising that the showson Monday have fewer tune-ins than do shows aired later in theweek Interestingly the three shows with the largest number oftune-ins were aired in the same time-slot Thursday at 1000 PM Thismay indicate the strategic use of tune-ins by networks

The variable Count indicates the number of times that ani jt

individual i was exposed to a tune-in for a show jt This variable wascreated by matching the Nielsen data on individualsrsquo viewing choiceswith the information in Tune In In principle the effect of tune-insjt

can then be estimated by examining the effects of this variable onindividual viewing decisions after controlling for other characteris-tics The resulting estimates will be biased in general however Thefollowing example illustrates the source of this bias

Eight tune-in advertisements for the ABC news magazine 20 r 20aired during the following time slots and shows Monday 1030( ) ( ) (Monday Night Football Tuesday 945 Coach Tuesday 1015 NYPD

) ( ) (Blue Wednesday 915 Grace Under Fire Wednesday 1015 Prime) ( ) (Time Live Thursday 915 Movie Columbo Thursday 1015 Murder

) ( )One and Friday 945 Hanginrsquo with Mr Cooper In Table VI weestimate a probit model to test the hypothesis that individuals who

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 6: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy368

Day Network 800 830 900 930 1000 1030

Mon ABC The Marshal Pro Football Philadelphia at Dallas

CBS The Nanny Canrsquot HurryLove

Murphy Brown High Society Chicago Hope

NBC Fresh Princeof Bel-Air

In the House Movie She Fought Alone

FOX Melrose Place Beverly Hills 90210 Affiliate Programming News

Tue ABC Roseanne Hudson Street HomeImprovement

Coach NYPD Blue

CBS The Client Movie Nothing Lasts Forever

NBC Wings News Radio Frasier Pursuit ofHappiness

Dateline NBC

FOX Movie Bram Stokerrsquos Dracula Affiliate Programming News

Wed ABC Ellen The DrewCarey Show

Grace UnderFire

The NakedTruth

Prime Time Live

CBS Bless thisHouse

Daversquos World Central Park West Courthouse

NBC Seaquest 2032 Dateline NBC Law amp Order

FOX Beverly Hills 90210 Party of Five Affiliate Programming News

Thu ABC Movie Columbo Itrsquos All in the Game Murder One

CBS Murder She Wrote New York News 48 Hours

NBC Friends The SingleGuy

Seinfeld Caroline inthe City

ER

FOX Living Single The Crew New York Undercover Affiliate Programming News

Fri ABC FamilyMatters

Boy MeetsWorld

Step by Step Hanginrsquo WithMr Cooper

2020

CBS Here Comes the Bride Ice Wars USA vs The World

NBC Unsolved Mysteries Dateline NBC Homicide Life on the Street

FOX Strange Luck X-Files Affiliate Programming News

The purpose of this study is to examine the effects of tune-inson viewing decisions In Section 3 we present the viewing-choicemodel that we use to estimate these effects The structure of this

( )model is similar to that of Shachar and Emerson 1996 which foundthat demographic characteristics of a showrsquos cast and of individuals

The Effectiveness and Targeting of Television Advertising 369

table II

Summary Statistics IndividualDemographic Characteristics

aVariable Mean Std Dev

Kids 00794 02704Teens 00627 02425Gen-X 02400 04272Boom 02764 04474Old 04191 04936Female 05319 04991Male 04681 04991Family 04304 04953Adult 08579 03492Income 08333 02259Educat 07421 02216Urban 04149 04929Basic 03642 04813Premium 03588 04798

a ( )Definitions dummy variables unless otherwise specified lsquolsquoKidsrsquorsquo individu al is between the ages of 7and 11 lsquolsquoTeensrsquorsquo individual is between the ages of 12 and 17 lsquolsquoGen-Xrsquorsquo individu al is between the ages of18 and 34 lsquolsquoBoomrsquorsquo individual is between the ages of 35 and 49 lsquolsquoOldrsquorsquo individu al is age 50 or olderlsquolsquoFemalersquorsquo individual is a female lsquolsquoM alersquorsquo individu al is a male lsquolsquoFamilyrsquorsquo individu al lives in a householdwith a female older than 18 and her kids lsquolsquoAdu ltrsquorsquo individual is older than 18 lsquolsquo Incom ersquorsquo there are sixlevels of incom e on the unit interval lsquolsquoEdu catrsquorsquo there are five categories of education on the unit intervallsquolsquoUrbanrsquorsquo individu al lives in an urban area lsquolsquoBasicrsquorsquo individu al has basic cable lsquolsquoPremiumrsquorsquo individu al haspremium cable

as well as five show attributesmdashaction comedy romance suspenseand fictionmdashare important in explaining viewing decisions We brieflydescribe each of these variables below

Table II defines all the individual demographic variables andpresents their summary statistics Show demographics are describedin Table III In Table IV we present the various attributes for eachshow each of which is normalized to lie between 0 and 1 Theseattributes were subjectively measured by four research assistantswho both watched the entire tapes of the weekrsquos shows and usedpreexisting knowledge about the shows in constructing these mea-sures13

13 For details on the construction of these attribute measures see Shachar and( )Emerson 1996

Journal of Economics amp Management Strategy370

table III

Summary Statistics Cast Demographicsof Shows

Show Cast Mean Std Dev

Gen-X 03438 04787Boom 02813 04532Family 01719 03802Male 04531 05017Female 02500 04364Black 00727 02603

( )Definitions all dummy variables lsquolsquoGen-Xrsquorsquo the main characters in the show are between the ages of 18and 34 lsquolsquoBoomrsquorsquo the main characters in the show are between the ages of 35 and 49 lsquolsquoFamilyrsquorsquo the maincharacters in the show are members of a family lsquolsquoM alersquorsquo the main characters in the show are malelsquolsquoFemalersquorsquo the main characters in the show are female lsquolsquoBlackrsquorsquo the main characters in the show are black

table IV

Show Attributes

Show Network Action Comedy Fiction Romance Suspense

Fresh Prince of Bel-Air NBC 011 100 067 050 020Melrose Place FOX 033 000 067 075 080The Marshal ABC 056 000 067 038 060The Nanny CBS 000 100 067 063 020Canrsquot Hurry Love CBS 000 100 067 088 020In The House NBC 022 100 067 025 020Pro Football ABC 100 014 000 000 100Beverly Hills 90210 FOX 022 043 067 100 060She Fought Alone NBC 067 029 033 075 080Murphy Brown CBS 011 100 067 050 020High Society CBS 000 100 067 038 020Chicago Hope CBS 067 014 033 063 080Roseanne ABC 000 100 067 075 020Bram Stoker rsquos Dracula FOX 067 000 100 063 080Wings NBC 011 100 067 075 020The Client CBS 022 014 033 025 060NewsRadio NBC 000 100 067 038 020Hudson Street ABC 000 100 067 088 020Nothing Lasts Forever CBS 033 000 067 063 080Home Improvement ABC 022 100 067 075 020Frasier NBC 000 100 067 063 020Pursuit of Happiness NBC 000 100 067 088 020Coach ABC 000 100 067 063 020Dateline NBC NBC 022 000 000 000 040NYPD Blue ABC 056 014 033 063 080Bless This House CBS 000 100 067 050 020Ellen ABC 000 100 067 025 020

The Effectiveness and Targeting of Television Advertising 371

table IV( )Continued

Show Network Action Comedy Fiction Romance Suspense

Beverly Hills 90210 FOX 022 043 067 100 100Seaquest 2030 NBC 100 000 100 013 080The Drew Carey Show ABC 011 100 067 000 020Daversquos World CBS 000 100 067 050 020Dateline NBC NBC 011 000 000 000 080Party of Five FOX 000 029 067 100 020Grace Under Fire ABC 000 100 067 038 020Central Park West CBS 022 014 067 075 080The Naked Truth ABC 011 100 067 088 020Law and Order NBC 067 043 033 013 100Courthouse CBS 033 029 067 088 080Prime Time Live ABC 078 014 000 025 080Murder She Wrote CBS 044 014 067 038 080Living Single FOX 000 100 067 075 040Columbo It rsquos All in the Game ABC 044 043 067 075 080Friends NBC 000 100 067 088 060The Crew FOX 000 100 067 063 020The Single Guy NBC 000 100 067 088 020Seinfeld NBC 011 100 067 063 060New York News CBS 056 014 033 050 060New York Undercover FOX 089 029 033 050 100Caroline in the City NBC 000 100 067 100 02048 Hours CBS 022 000 000 025 040ER NBC 100 029 033 050 080Murder One ABC 033 000 033 050 080Strange Luck FOX 078 029 100 050 080Family Matters ABC 022 100 067 050 020Unsolved Mysteries NBC 044 000 033 000 100CBS Friday Night Movie CBS 033 100 000 050 020Boy Meets World ABC 022 100 067 050 020Ice Wars USA vs The World CBS 078 014 000 000 060X-Files FOX 100 029 100 025 100Step by Step ABC 000 100 067 075 020Dateline NBC NBC 022 014 000 025 040Hanginrsquo with Mr Cooper ABC 022 100 067 050 020Homicide Life on the Street NBC 067 029 033 013 10020 r 20 ABC 022 013 000 013 040

The variable Tune In indicates whether there was a tune-injt(advertisement for a show jt ie a show on network j in a given time

)slot t in each time slot during the week Obviously there are notune-ins for a show in any time slot subsequent to when it is aired

Table V presents the shows ordered by their number of tune-ins

Journal of Economics amp Management Strategy372

table V

Show Tune-Ins

Show Network Day Tune-Ins

The Nanny CBS Monday 0The Marshal ABC Monday 0Melrose Place FOX Monday 0Fresh Prince of Bel-Air NBC Monday 0Pro Football ABC Monday 1Home Improvement ABC Tuesday 2Roseanne ABC Tuesday 2Coach ABC Tuesday 2Beverly Hills 90210 FOX Monday 2Family Matters ABC Friday 2Wings NBC Tuesday 2NYPD Blue ABC Tuesday 2X-Files FOX Friday 2Murphy Brown CBS Monday 2Hudson Street ABC Tuesday 2Canrsquot Hurry Love CBS Monday 2In The House NBC Monday 2Chicago Hope CBS Monday 2Ellen ABC Wednesday 3Bram Stoker rsquos Dracula FOX Tuesday 3Dateline NBC NBC Wednesday 3Boy Meets World ABC Friday 3Seaquest 2030 NBC Wednesday 3Step by Step ABC Friday 3Unsolved Mysteries NBC Friday 3Hanginrsquo with Mr Cooper ABC Friday 3Grace Under Fire ABC Wednesday 3High Society CBS Monday 3The Naked Truth ABC Wednesday 3Dateline NBC NBC Friday 3Courthouse CBS Wednesday 4Strange Luck FOX Friday 4NewsRadio NBC Tuesday 4The Client CBS Tuesday 4Homicide Life on the Street NBC Friday 4Frasier NBC Tuesday 4New York Undercover FOX Thursday 4Living Single FOX Thursday 4Law amp Order NBC Wednesday 4She Fought Alone NBC Monday 4The Drew Carey Show ABC Wednesday 4Bless This House CBS Wednesday 4Nothing Lasts Forever CBS Tuesday 5Columbo It rsquos All in the Game ABC Thursday 5Pursuit of Happiness NBC Tuesday 5Dateline NBC NBC Tuesday 5

The Effectiveness and Targeting of Television Advertising 373

table V( )Continued

Show Network Day Tune-Ins

Beverly Hills 90210 FOX Wednesday 5The Crew FOX Thursday 5Central Park West CBS Wednesday 5Murder She Wrote CBS Thursday 6Daversquos World CBS Wednesday 6Party of Five FOX Wednesday 6Prime Time Live ABC Wednesday 6CBS Friday Night Movie CBS Friday 6Seinfeld NBC Thursday 6Friends NBC Thursday 6The Single Guy NBC Thursday 7Ice Wars USA vs The World CBS Friday 7Caroline in the City NBC Thursday 7Murder One ABC Thursday 8New York News CBS Thursday 820 r 20 ABC Friday 8ER NBC Thursday 948 Hours CBS Thursday 10

Since the data contain information only on tune-ins that were airedon prime time starting on Monday it is not surprising that the showson Monday have fewer tune-ins than do shows aired later in theweek Interestingly the three shows with the largest number oftune-ins were aired in the same time-slot Thursday at 1000 PM Thismay indicate the strategic use of tune-ins by networks

The variable Count indicates the number of times that ani jt

individual i was exposed to a tune-in for a show jt This variable wascreated by matching the Nielsen data on individualsrsquo viewing choiceswith the information in Tune In In principle the effect of tune-insjt

can then be estimated by examining the effects of this variable onindividual viewing decisions after controlling for other characteris-tics The resulting estimates will be biased in general however Thefollowing example illustrates the source of this bias

Eight tune-in advertisements for the ABC news magazine 20 r 20aired during the following time slots and shows Monday 1030( ) ( ) (Monday Night Football Tuesday 945 Coach Tuesday 1015 NYPD

) ( ) (Blue Wednesday 915 Grace Under Fire Wednesday 1015 Prime) ( ) (Time Live Thursday 915 Movie Columbo Thursday 1015 Murder

) ( )One and Friday 945 Hanginrsquo with Mr Cooper In Table VI weestimate a probit model to test the hypothesis that individuals who

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 7: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 369

table II

Summary Statistics IndividualDemographic Characteristics

aVariable Mean Std Dev

Kids 00794 02704Teens 00627 02425Gen-X 02400 04272Boom 02764 04474Old 04191 04936Female 05319 04991Male 04681 04991Family 04304 04953Adult 08579 03492Income 08333 02259Educat 07421 02216Urban 04149 04929Basic 03642 04813Premium 03588 04798

a ( )Definitions dummy variables unless otherwise specified lsquolsquoKidsrsquorsquo individu al is between the ages of 7and 11 lsquolsquoTeensrsquorsquo individual is between the ages of 12 and 17 lsquolsquoGen-Xrsquorsquo individu al is between the ages of18 and 34 lsquolsquoBoomrsquorsquo individual is between the ages of 35 and 49 lsquolsquoOldrsquorsquo individu al is age 50 or olderlsquolsquoFemalersquorsquo individual is a female lsquolsquoM alersquorsquo individu al is a male lsquolsquoFamilyrsquorsquo individu al lives in a householdwith a female older than 18 and her kids lsquolsquoAdu ltrsquorsquo individual is older than 18 lsquolsquo Incom ersquorsquo there are sixlevels of incom e on the unit interval lsquolsquoEdu catrsquorsquo there are five categories of education on the unit intervallsquolsquoUrbanrsquorsquo individu al lives in an urban area lsquolsquoBasicrsquorsquo individu al has basic cable lsquolsquoPremiumrsquorsquo individu al haspremium cable

as well as five show attributesmdashaction comedy romance suspenseand fictionmdashare important in explaining viewing decisions We brieflydescribe each of these variables below

Table II defines all the individual demographic variables andpresents their summary statistics Show demographics are describedin Table III In Table IV we present the various attributes for eachshow each of which is normalized to lie between 0 and 1 Theseattributes were subjectively measured by four research assistantswho both watched the entire tapes of the weekrsquos shows and usedpreexisting knowledge about the shows in constructing these mea-sures13

13 For details on the construction of these attribute measures see Shachar and( )Emerson 1996

Journal of Economics amp Management Strategy370

table III

Summary Statistics Cast Demographicsof Shows

Show Cast Mean Std Dev

Gen-X 03438 04787Boom 02813 04532Family 01719 03802Male 04531 05017Female 02500 04364Black 00727 02603

( )Definitions all dummy variables lsquolsquoGen-Xrsquorsquo the main characters in the show are between the ages of 18and 34 lsquolsquoBoomrsquorsquo the main characters in the show are between the ages of 35 and 49 lsquolsquoFamilyrsquorsquo the maincharacters in the show are members of a family lsquolsquoM alersquorsquo the main characters in the show are malelsquolsquoFemalersquorsquo the main characters in the show are female lsquolsquoBlackrsquorsquo the main characters in the show are black

table IV

Show Attributes

Show Network Action Comedy Fiction Romance Suspense

Fresh Prince of Bel-Air NBC 011 100 067 050 020Melrose Place FOX 033 000 067 075 080The Marshal ABC 056 000 067 038 060The Nanny CBS 000 100 067 063 020Canrsquot Hurry Love CBS 000 100 067 088 020In The House NBC 022 100 067 025 020Pro Football ABC 100 014 000 000 100Beverly Hills 90210 FOX 022 043 067 100 060She Fought Alone NBC 067 029 033 075 080Murphy Brown CBS 011 100 067 050 020High Society CBS 000 100 067 038 020Chicago Hope CBS 067 014 033 063 080Roseanne ABC 000 100 067 075 020Bram Stoker rsquos Dracula FOX 067 000 100 063 080Wings NBC 011 100 067 075 020The Client CBS 022 014 033 025 060NewsRadio NBC 000 100 067 038 020Hudson Street ABC 000 100 067 088 020Nothing Lasts Forever CBS 033 000 067 063 080Home Improvement ABC 022 100 067 075 020Frasier NBC 000 100 067 063 020Pursuit of Happiness NBC 000 100 067 088 020Coach ABC 000 100 067 063 020Dateline NBC NBC 022 000 000 000 040NYPD Blue ABC 056 014 033 063 080Bless This House CBS 000 100 067 050 020Ellen ABC 000 100 067 025 020

The Effectiveness and Targeting of Television Advertising 371

table IV( )Continued

Show Network Action Comedy Fiction Romance Suspense

Beverly Hills 90210 FOX 022 043 067 100 100Seaquest 2030 NBC 100 000 100 013 080The Drew Carey Show ABC 011 100 067 000 020Daversquos World CBS 000 100 067 050 020Dateline NBC NBC 011 000 000 000 080Party of Five FOX 000 029 067 100 020Grace Under Fire ABC 000 100 067 038 020Central Park West CBS 022 014 067 075 080The Naked Truth ABC 011 100 067 088 020Law and Order NBC 067 043 033 013 100Courthouse CBS 033 029 067 088 080Prime Time Live ABC 078 014 000 025 080Murder She Wrote CBS 044 014 067 038 080Living Single FOX 000 100 067 075 040Columbo It rsquos All in the Game ABC 044 043 067 075 080Friends NBC 000 100 067 088 060The Crew FOX 000 100 067 063 020The Single Guy NBC 000 100 067 088 020Seinfeld NBC 011 100 067 063 060New York News CBS 056 014 033 050 060New York Undercover FOX 089 029 033 050 100Caroline in the City NBC 000 100 067 100 02048 Hours CBS 022 000 000 025 040ER NBC 100 029 033 050 080Murder One ABC 033 000 033 050 080Strange Luck FOX 078 029 100 050 080Family Matters ABC 022 100 067 050 020Unsolved Mysteries NBC 044 000 033 000 100CBS Friday Night Movie CBS 033 100 000 050 020Boy Meets World ABC 022 100 067 050 020Ice Wars USA vs The World CBS 078 014 000 000 060X-Files FOX 100 029 100 025 100Step by Step ABC 000 100 067 075 020Dateline NBC NBC 022 014 000 025 040Hanginrsquo with Mr Cooper ABC 022 100 067 050 020Homicide Life on the Street NBC 067 029 033 013 10020 r 20 ABC 022 013 000 013 040

The variable Tune In indicates whether there was a tune-injt(advertisement for a show jt ie a show on network j in a given time

)slot t in each time slot during the week Obviously there are notune-ins for a show in any time slot subsequent to when it is aired

Table V presents the shows ordered by their number of tune-ins

Journal of Economics amp Management Strategy372

table V

Show Tune-Ins

Show Network Day Tune-Ins

The Nanny CBS Monday 0The Marshal ABC Monday 0Melrose Place FOX Monday 0Fresh Prince of Bel-Air NBC Monday 0Pro Football ABC Monday 1Home Improvement ABC Tuesday 2Roseanne ABC Tuesday 2Coach ABC Tuesday 2Beverly Hills 90210 FOX Monday 2Family Matters ABC Friday 2Wings NBC Tuesday 2NYPD Blue ABC Tuesday 2X-Files FOX Friday 2Murphy Brown CBS Monday 2Hudson Street ABC Tuesday 2Canrsquot Hurry Love CBS Monday 2In The House NBC Monday 2Chicago Hope CBS Monday 2Ellen ABC Wednesday 3Bram Stoker rsquos Dracula FOX Tuesday 3Dateline NBC NBC Wednesday 3Boy Meets World ABC Friday 3Seaquest 2030 NBC Wednesday 3Step by Step ABC Friday 3Unsolved Mysteries NBC Friday 3Hanginrsquo with Mr Cooper ABC Friday 3Grace Under Fire ABC Wednesday 3High Society CBS Monday 3The Naked Truth ABC Wednesday 3Dateline NBC NBC Friday 3Courthouse CBS Wednesday 4Strange Luck FOX Friday 4NewsRadio NBC Tuesday 4The Client CBS Tuesday 4Homicide Life on the Street NBC Friday 4Frasier NBC Tuesday 4New York Undercover FOX Thursday 4Living Single FOX Thursday 4Law amp Order NBC Wednesday 4She Fought Alone NBC Monday 4The Drew Carey Show ABC Wednesday 4Bless This House CBS Wednesday 4Nothing Lasts Forever CBS Tuesday 5Columbo It rsquos All in the Game ABC Thursday 5Pursuit of Happiness NBC Tuesday 5Dateline NBC NBC Tuesday 5

The Effectiveness and Targeting of Television Advertising 373

table V( )Continued

Show Network Day Tune-Ins

Beverly Hills 90210 FOX Wednesday 5The Crew FOX Thursday 5Central Park West CBS Wednesday 5Murder She Wrote CBS Thursday 6Daversquos World CBS Wednesday 6Party of Five FOX Wednesday 6Prime Time Live ABC Wednesday 6CBS Friday Night Movie CBS Friday 6Seinfeld NBC Thursday 6Friends NBC Thursday 6The Single Guy NBC Thursday 7Ice Wars USA vs The World CBS Friday 7Caroline in the City NBC Thursday 7Murder One ABC Thursday 8New York News CBS Thursday 820 r 20 ABC Friday 8ER NBC Thursday 948 Hours CBS Thursday 10

Since the data contain information only on tune-ins that were airedon prime time starting on Monday it is not surprising that the showson Monday have fewer tune-ins than do shows aired later in theweek Interestingly the three shows with the largest number oftune-ins were aired in the same time-slot Thursday at 1000 PM Thismay indicate the strategic use of tune-ins by networks

The variable Count indicates the number of times that ani jt

individual i was exposed to a tune-in for a show jt This variable wascreated by matching the Nielsen data on individualsrsquo viewing choiceswith the information in Tune In In principle the effect of tune-insjt

can then be estimated by examining the effects of this variable onindividual viewing decisions after controlling for other characteris-tics The resulting estimates will be biased in general however Thefollowing example illustrates the source of this bias

Eight tune-in advertisements for the ABC news magazine 20 r 20aired during the following time slots and shows Monday 1030( ) ( ) (Monday Night Football Tuesday 945 Coach Tuesday 1015 NYPD

) ( ) (Blue Wednesday 915 Grace Under Fire Wednesday 1015 Prime) ( ) (Time Live Thursday 915 Movie Columbo Thursday 1015 Murder

) ( )One and Friday 945 Hanginrsquo with Mr Cooper In Table VI weestimate a probit model to test the hypothesis that individuals who

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 8: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy370

table III

Summary Statistics Cast Demographicsof Shows

Show Cast Mean Std Dev

Gen-X 03438 04787Boom 02813 04532Family 01719 03802Male 04531 05017Female 02500 04364Black 00727 02603

( )Definitions all dummy variables lsquolsquoGen-Xrsquorsquo the main characters in the show are between the ages of 18and 34 lsquolsquoBoomrsquorsquo the main characters in the show are between the ages of 35 and 49 lsquolsquoFamilyrsquorsquo the maincharacters in the show are members of a family lsquolsquoM alersquorsquo the main characters in the show are malelsquolsquoFemalersquorsquo the main characters in the show are female lsquolsquoBlackrsquorsquo the main characters in the show are black

table IV

Show Attributes

Show Network Action Comedy Fiction Romance Suspense

Fresh Prince of Bel-Air NBC 011 100 067 050 020Melrose Place FOX 033 000 067 075 080The Marshal ABC 056 000 067 038 060The Nanny CBS 000 100 067 063 020Canrsquot Hurry Love CBS 000 100 067 088 020In The House NBC 022 100 067 025 020Pro Football ABC 100 014 000 000 100Beverly Hills 90210 FOX 022 043 067 100 060She Fought Alone NBC 067 029 033 075 080Murphy Brown CBS 011 100 067 050 020High Society CBS 000 100 067 038 020Chicago Hope CBS 067 014 033 063 080Roseanne ABC 000 100 067 075 020Bram Stoker rsquos Dracula FOX 067 000 100 063 080Wings NBC 011 100 067 075 020The Client CBS 022 014 033 025 060NewsRadio NBC 000 100 067 038 020Hudson Street ABC 000 100 067 088 020Nothing Lasts Forever CBS 033 000 067 063 080Home Improvement ABC 022 100 067 075 020Frasier NBC 000 100 067 063 020Pursuit of Happiness NBC 000 100 067 088 020Coach ABC 000 100 067 063 020Dateline NBC NBC 022 000 000 000 040NYPD Blue ABC 056 014 033 063 080Bless This House CBS 000 100 067 050 020Ellen ABC 000 100 067 025 020

The Effectiveness and Targeting of Television Advertising 371

table IV( )Continued

Show Network Action Comedy Fiction Romance Suspense

Beverly Hills 90210 FOX 022 043 067 100 100Seaquest 2030 NBC 100 000 100 013 080The Drew Carey Show ABC 011 100 067 000 020Daversquos World CBS 000 100 067 050 020Dateline NBC NBC 011 000 000 000 080Party of Five FOX 000 029 067 100 020Grace Under Fire ABC 000 100 067 038 020Central Park West CBS 022 014 067 075 080The Naked Truth ABC 011 100 067 088 020Law and Order NBC 067 043 033 013 100Courthouse CBS 033 029 067 088 080Prime Time Live ABC 078 014 000 025 080Murder She Wrote CBS 044 014 067 038 080Living Single FOX 000 100 067 075 040Columbo It rsquos All in the Game ABC 044 043 067 075 080Friends NBC 000 100 067 088 060The Crew FOX 000 100 067 063 020The Single Guy NBC 000 100 067 088 020Seinfeld NBC 011 100 067 063 060New York News CBS 056 014 033 050 060New York Undercover FOX 089 029 033 050 100Caroline in the City NBC 000 100 067 100 02048 Hours CBS 022 000 000 025 040ER NBC 100 029 033 050 080Murder One ABC 033 000 033 050 080Strange Luck FOX 078 029 100 050 080Family Matters ABC 022 100 067 050 020Unsolved Mysteries NBC 044 000 033 000 100CBS Friday Night Movie CBS 033 100 000 050 020Boy Meets World ABC 022 100 067 050 020Ice Wars USA vs The World CBS 078 014 000 000 060X-Files FOX 100 029 100 025 100Step by Step ABC 000 100 067 075 020Dateline NBC NBC 022 014 000 025 040Hanginrsquo with Mr Cooper ABC 022 100 067 050 020Homicide Life on the Street NBC 067 029 033 013 10020 r 20 ABC 022 013 000 013 040

The variable Tune In indicates whether there was a tune-injt(advertisement for a show jt ie a show on network j in a given time

)slot t in each time slot during the week Obviously there are notune-ins for a show in any time slot subsequent to when it is aired

Table V presents the shows ordered by their number of tune-ins

Journal of Economics amp Management Strategy372

table V

Show Tune-Ins

Show Network Day Tune-Ins

The Nanny CBS Monday 0The Marshal ABC Monday 0Melrose Place FOX Monday 0Fresh Prince of Bel-Air NBC Monday 0Pro Football ABC Monday 1Home Improvement ABC Tuesday 2Roseanne ABC Tuesday 2Coach ABC Tuesday 2Beverly Hills 90210 FOX Monday 2Family Matters ABC Friday 2Wings NBC Tuesday 2NYPD Blue ABC Tuesday 2X-Files FOX Friday 2Murphy Brown CBS Monday 2Hudson Street ABC Tuesday 2Canrsquot Hurry Love CBS Monday 2In The House NBC Monday 2Chicago Hope CBS Monday 2Ellen ABC Wednesday 3Bram Stoker rsquos Dracula FOX Tuesday 3Dateline NBC NBC Wednesday 3Boy Meets World ABC Friday 3Seaquest 2030 NBC Wednesday 3Step by Step ABC Friday 3Unsolved Mysteries NBC Friday 3Hanginrsquo with Mr Cooper ABC Friday 3Grace Under Fire ABC Wednesday 3High Society CBS Monday 3The Naked Truth ABC Wednesday 3Dateline NBC NBC Friday 3Courthouse CBS Wednesday 4Strange Luck FOX Friday 4NewsRadio NBC Tuesday 4The Client CBS Tuesday 4Homicide Life on the Street NBC Friday 4Frasier NBC Tuesday 4New York Undercover FOX Thursday 4Living Single FOX Thursday 4Law amp Order NBC Wednesday 4She Fought Alone NBC Monday 4The Drew Carey Show ABC Wednesday 4Bless This House CBS Wednesday 4Nothing Lasts Forever CBS Tuesday 5Columbo It rsquos All in the Game ABC Thursday 5Pursuit of Happiness NBC Tuesday 5Dateline NBC NBC Tuesday 5

The Effectiveness and Targeting of Television Advertising 373

table V( )Continued

Show Network Day Tune-Ins

Beverly Hills 90210 FOX Wednesday 5The Crew FOX Thursday 5Central Park West CBS Wednesday 5Murder She Wrote CBS Thursday 6Daversquos World CBS Wednesday 6Party of Five FOX Wednesday 6Prime Time Live ABC Wednesday 6CBS Friday Night Movie CBS Friday 6Seinfeld NBC Thursday 6Friends NBC Thursday 6The Single Guy NBC Thursday 7Ice Wars USA vs The World CBS Friday 7Caroline in the City NBC Thursday 7Murder One ABC Thursday 8New York News CBS Thursday 820 r 20 ABC Friday 8ER NBC Thursday 948 Hours CBS Thursday 10

Since the data contain information only on tune-ins that were airedon prime time starting on Monday it is not surprising that the showson Monday have fewer tune-ins than do shows aired later in theweek Interestingly the three shows with the largest number oftune-ins were aired in the same time-slot Thursday at 1000 PM Thismay indicate the strategic use of tune-ins by networks

The variable Count indicates the number of times that ani jt

individual i was exposed to a tune-in for a show jt This variable wascreated by matching the Nielsen data on individualsrsquo viewing choiceswith the information in Tune In In principle the effect of tune-insjt

can then be estimated by examining the effects of this variable onindividual viewing decisions after controlling for other characteris-tics The resulting estimates will be biased in general however Thefollowing example illustrates the source of this bias

Eight tune-in advertisements for the ABC news magazine 20 r 20aired during the following time slots and shows Monday 1030( ) ( ) (Monday Night Football Tuesday 945 Coach Tuesday 1015 NYPD

) ( ) (Blue Wednesday 915 Grace Under Fire Wednesday 1015 Prime) ( ) (Time Live Thursday 915 Movie Columbo Thursday 1015 Murder

) ( )One and Friday 945 Hanginrsquo with Mr Cooper In Table VI weestimate a probit model to test the hypothesis that individuals who

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 9: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 371

table IV( )Continued

Show Network Action Comedy Fiction Romance Suspense

Beverly Hills 90210 FOX 022 043 067 100 100Seaquest 2030 NBC 100 000 100 013 080The Drew Carey Show ABC 011 100 067 000 020Daversquos World CBS 000 100 067 050 020Dateline NBC NBC 011 000 000 000 080Party of Five FOX 000 029 067 100 020Grace Under Fire ABC 000 100 067 038 020Central Park West CBS 022 014 067 075 080The Naked Truth ABC 011 100 067 088 020Law and Order NBC 067 043 033 013 100Courthouse CBS 033 029 067 088 080Prime Time Live ABC 078 014 000 025 080Murder She Wrote CBS 044 014 067 038 080Living Single FOX 000 100 067 075 040Columbo It rsquos All in the Game ABC 044 043 067 075 080Friends NBC 000 100 067 088 060The Crew FOX 000 100 067 063 020The Single Guy NBC 000 100 067 088 020Seinfeld NBC 011 100 067 063 060New York News CBS 056 014 033 050 060New York Undercover FOX 089 029 033 050 100Caroline in the City NBC 000 100 067 100 02048 Hours CBS 022 000 000 025 040ER NBC 100 029 033 050 080Murder One ABC 033 000 033 050 080Strange Luck FOX 078 029 100 050 080Family Matters ABC 022 100 067 050 020Unsolved Mysteries NBC 044 000 033 000 100CBS Friday Night Movie CBS 033 100 000 050 020Boy Meets World ABC 022 100 067 050 020Ice Wars USA vs The World CBS 078 014 000 000 060X-Files FOX 100 029 100 025 100Step by Step ABC 000 100 067 075 020Dateline NBC NBC 022 014 000 025 040Hanginrsquo with Mr Cooper ABC 022 100 067 050 020Homicide Life on the Street NBC 067 029 033 013 10020 r 20 ABC 022 013 000 013 040

The variable Tune In indicates whether there was a tune-injt(advertisement for a show jt ie a show on network j in a given time

)slot t in each time slot during the week Obviously there are notune-ins for a show in any time slot subsequent to when it is aired

Table V presents the shows ordered by their number of tune-ins

Journal of Economics amp Management Strategy372

table V

Show Tune-Ins

Show Network Day Tune-Ins

The Nanny CBS Monday 0The Marshal ABC Monday 0Melrose Place FOX Monday 0Fresh Prince of Bel-Air NBC Monday 0Pro Football ABC Monday 1Home Improvement ABC Tuesday 2Roseanne ABC Tuesday 2Coach ABC Tuesday 2Beverly Hills 90210 FOX Monday 2Family Matters ABC Friday 2Wings NBC Tuesday 2NYPD Blue ABC Tuesday 2X-Files FOX Friday 2Murphy Brown CBS Monday 2Hudson Street ABC Tuesday 2Canrsquot Hurry Love CBS Monday 2In The House NBC Monday 2Chicago Hope CBS Monday 2Ellen ABC Wednesday 3Bram Stoker rsquos Dracula FOX Tuesday 3Dateline NBC NBC Wednesday 3Boy Meets World ABC Friday 3Seaquest 2030 NBC Wednesday 3Step by Step ABC Friday 3Unsolved Mysteries NBC Friday 3Hanginrsquo with Mr Cooper ABC Friday 3Grace Under Fire ABC Wednesday 3High Society CBS Monday 3The Naked Truth ABC Wednesday 3Dateline NBC NBC Friday 3Courthouse CBS Wednesday 4Strange Luck FOX Friday 4NewsRadio NBC Tuesday 4The Client CBS Tuesday 4Homicide Life on the Street NBC Friday 4Frasier NBC Tuesday 4New York Undercover FOX Thursday 4Living Single FOX Thursday 4Law amp Order NBC Wednesday 4She Fought Alone NBC Monday 4The Drew Carey Show ABC Wednesday 4Bless This House CBS Wednesday 4Nothing Lasts Forever CBS Tuesday 5Columbo It rsquos All in the Game ABC Thursday 5Pursuit of Happiness NBC Tuesday 5Dateline NBC NBC Tuesday 5

The Effectiveness and Targeting of Television Advertising 373

table V( )Continued

Show Network Day Tune-Ins

Beverly Hills 90210 FOX Wednesday 5The Crew FOX Thursday 5Central Park West CBS Wednesday 5Murder She Wrote CBS Thursday 6Daversquos World CBS Wednesday 6Party of Five FOX Wednesday 6Prime Time Live ABC Wednesday 6CBS Friday Night Movie CBS Friday 6Seinfeld NBC Thursday 6Friends NBC Thursday 6The Single Guy NBC Thursday 7Ice Wars USA vs The World CBS Friday 7Caroline in the City NBC Thursday 7Murder One ABC Thursday 8New York News CBS Thursday 820 r 20 ABC Friday 8ER NBC Thursday 948 Hours CBS Thursday 10

Since the data contain information only on tune-ins that were airedon prime time starting on Monday it is not surprising that the showson Monday have fewer tune-ins than do shows aired later in theweek Interestingly the three shows with the largest number oftune-ins were aired in the same time-slot Thursday at 1000 PM Thismay indicate the strategic use of tune-ins by networks

The variable Count indicates the number of times that ani jt

individual i was exposed to a tune-in for a show jt This variable wascreated by matching the Nielsen data on individualsrsquo viewing choiceswith the information in Tune In In principle the effect of tune-insjt

can then be estimated by examining the effects of this variable onindividual viewing decisions after controlling for other characteris-tics The resulting estimates will be biased in general however Thefollowing example illustrates the source of this bias

Eight tune-in advertisements for the ABC news magazine 20 r 20aired during the following time slots and shows Monday 1030( ) ( ) (Monday Night Football Tuesday 945 Coach Tuesday 1015 NYPD

) ( ) (Blue Wednesday 915 Grace Under Fire Wednesday 1015 Prime) ( ) (Time Live Thursday 915 Movie Columbo Thursday 1015 Murder

) ( )One and Friday 945 Hanginrsquo with Mr Cooper In Table VI weestimate a probit model to test the hypothesis that individuals who

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 10: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy372

table V

Show Tune-Ins

Show Network Day Tune-Ins

The Nanny CBS Monday 0The Marshal ABC Monday 0Melrose Place FOX Monday 0Fresh Prince of Bel-Air NBC Monday 0Pro Football ABC Monday 1Home Improvement ABC Tuesday 2Roseanne ABC Tuesday 2Coach ABC Tuesday 2Beverly Hills 90210 FOX Monday 2Family Matters ABC Friday 2Wings NBC Tuesday 2NYPD Blue ABC Tuesday 2X-Files FOX Friday 2Murphy Brown CBS Monday 2Hudson Street ABC Tuesday 2Canrsquot Hurry Love CBS Monday 2In The House NBC Monday 2Chicago Hope CBS Monday 2Ellen ABC Wednesday 3Bram Stoker rsquos Dracula FOX Tuesday 3Dateline NBC NBC Wednesday 3Boy Meets World ABC Friday 3Seaquest 2030 NBC Wednesday 3Step by Step ABC Friday 3Unsolved Mysteries NBC Friday 3Hanginrsquo with Mr Cooper ABC Friday 3Grace Under Fire ABC Wednesday 3High Society CBS Monday 3The Naked Truth ABC Wednesday 3Dateline NBC NBC Friday 3Courthouse CBS Wednesday 4Strange Luck FOX Friday 4NewsRadio NBC Tuesday 4The Client CBS Tuesday 4Homicide Life on the Street NBC Friday 4Frasier NBC Tuesday 4New York Undercover FOX Thursday 4Living Single FOX Thursday 4Law amp Order NBC Wednesday 4She Fought Alone NBC Monday 4The Drew Carey Show ABC Wednesday 4Bless This House CBS Wednesday 4Nothing Lasts Forever CBS Tuesday 5Columbo It rsquos All in the Game ABC Thursday 5Pursuit of Happiness NBC Tuesday 5Dateline NBC NBC Tuesday 5

The Effectiveness and Targeting of Television Advertising 373

table V( )Continued

Show Network Day Tune-Ins

Beverly Hills 90210 FOX Wednesday 5The Crew FOX Thursday 5Central Park West CBS Wednesday 5Murder She Wrote CBS Thursday 6Daversquos World CBS Wednesday 6Party of Five FOX Wednesday 6Prime Time Live ABC Wednesday 6CBS Friday Night Movie CBS Friday 6Seinfeld NBC Thursday 6Friends NBC Thursday 6The Single Guy NBC Thursday 7Ice Wars USA vs The World CBS Friday 7Caroline in the City NBC Thursday 7Murder One ABC Thursday 8New York News CBS Thursday 820 r 20 ABC Friday 8ER NBC Thursday 948 Hours CBS Thursday 10

Since the data contain information only on tune-ins that were airedon prime time starting on Monday it is not surprising that the showson Monday have fewer tune-ins than do shows aired later in theweek Interestingly the three shows with the largest number oftune-ins were aired in the same time-slot Thursday at 1000 PM Thismay indicate the strategic use of tune-ins by networks

The variable Count indicates the number of times that ani jt

individual i was exposed to a tune-in for a show jt This variable wascreated by matching the Nielsen data on individualsrsquo viewing choiceswith the information in Tune In In principle the effect of tune-insjt

can then be estimated by examining the effects of this variable onindividual viewing decisions after controlling for other characteris-tics The resulting estimates will be biased in general however Thefollowing example illustrates the source of this bias

Eight tune-in advertisements for the ABC news magazine 20 r 20aired during the following time slots and shows Monday 1030( ) ( ) (Monday Night Football Tuesday 945 Coach Tuesday 1015 NYPD

) ( ) (Blue Wednesday 915 Grace Under Fire Wednesday 1015 Prime) ( ) (Time Live Thursday 915 Movie Columbo Thursday 1015 Murder

) ( )One and Friday 945 Hanginrsquo with Mr Cooper In Table VI weestimate a probit model to test the hypothesis that individuals who

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 11: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 373

table V( )Continued

Show Network Day Tune-Ins

Beverly Hills 90210 FOX Wednesday 5The Crew FOX Thursday 5Central Park West CBS Wednesday 5Murder She Wrote CBS Thursday 6Daversquos World CBS Wednesday 6Party of Five FOX Wednesday 6Prime Time Live ABC Wednesday 6CBS Friday Night Movie CBS Friday 6Seinfeld NBC Thursday 6Friends NBC Thursday 6The Single Guy NBC Thursday 7Ice Wars USA vs The World CBS Friday 7Caroline in the City NBC Thursday 7Murder One ABC Thursday 8New York News CBS Thursday 820 r 20 ABC Friday 8ER NBC Thursday 948 Hours CBS Thursday 10

Since the data contain information only on tune-ins that were airedon prime time starting on Monday it is not surprising that the showson Monday have fewer tune-ins than do shows aired later in theweek Interestingly the three shows with the largest number oftune-ins were aired in the same time-slot Thursday at 1000 PM Thismay indicate the strategic use of tune-ins by networks

The variable Count indicates the number of times that ani jt

individual i was exposed to a tune-in for a show jt This variable wascreated by matching the Nielsen data on individualsrsquo viewing choiceswith the information in Tune In In principle the effect of tune-insjt

can then be estimated by examining the effects of this variable onindividual viewing decisions after controlling for other characteris-tics The resulting estimates will be biased in general however Thefollowing example illustrates the source of this bias

Eight tune-in advertisements for the ABC news magazine 20 r 20aired during the following time slots and shows Monday 1030( ) ( ) (Monday Night Football Tuesday 945 Coach Tuesday 1015 NYPD

) ( ) (Blue Wednesday 915 Grace Under Fire Wednesday 1015 Prime) ( ) (Time Live Thursday 915 Movie Columbo Thursday 1015 Murder

) ( )One and Friday 945 Hanginrsquo with Mr Cooper In Table VI weestimate a probit model to test the hypothesis that individuals who

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 12: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy374

table VIaAn Example to Illustrate Targeting

Variable Coefficient Standard Error

Lead-In 14938 01371Monday Night Football 00321 01666Coach 03149 01544NYPD Blue 01452 01561Grace Under Fire y 00920 01489Prime Time Live 09942 01388Columbo y 00267 02048Murder One 07413 02089Constant y 17985 00663

No of observations 1675Log likelihood y 38644

a Dependent variable the decision to watch 20 r 20

were exposed to any of these tune-ins had a higher propensity towatch 20 r 20 The dependent variable is equal to one if a personwatched 20 r 20 and zero otherwise The explanatory variables are( )1 a dummy variable set equal to one if the person was watching

( )ABC in the previous time slot ie at 945 on Friday and zero( ) ( )otherwise this captures the lsquolsquolead-inrsquorsquo effect and 2 for each tune-in

a dummy variable equal to one for individuals who watched thetune-in and zero for those who did not

The estimation results reveal that not all tune-ins were effective

For example viewers exposed to the tune-in while watching NYPDBlue did not have a higher propensity ex post to watch 20 r 20 On theother hand some tune-insmdashthose aired during Coach Prime TimeLive and Murder One for examplemdashwere indeed effective Howeverthese results do not necessarily indicate that the advertisementsduring these shows were effective since there is an alternativeexplanation The networks probably do not choose the timing of theirtune-ins randomly rather they may air the ad for a show duringother shows with similar characteristics in order to target a particularaudience One of the ads for 20 r 20 occurred during the ABC newsmagazine Prime Time Live As Table VI shows being exposed to an adduring Prime Time Live had the strongest explanatory power amongthe exposure variables increasing the viewing probability by almost

( )21 with a t-value of about 7 This may merely indicate howeverthat some viewers may like news magazines more than others andthus have a higher ex ante propensity to watch both Prime Time Liveand 20 r 20 Since such preferences are unobserved an individualrsquos

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 13: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 375

exposure to tune-ins for 20 r 20 aired during Prime Time Live isendogenous14 hence the estimate of its effect is biased

To summarize since the networks air their tune-ins duringshows with a viewing audience that has a higher ex ante propensityto watch the promoted show the effect of exposure to an ad onviewing decisions reflects both the effectiveness of the ad and thetargeting of the network We explicitly deal with this endogeneityproblem in the model below

3 Model Estimation and Identification

In each time slot t individual i makes her viewing choice C fromitamong six options She may either choose to watch a particular show

( )on any of the four networks watch nonnetwork including cable TV( )or not watch TV ie pursue some outside alternative Each of these

alternatives is indexed by j with j s 1 indexing the outside optionj s 2 5 corresponding to the four networks ABC CBS NBCand FOX respectively and j s 6 denoting cable TV and other non-network channels An individual i is assumed to derive utilityfrom alternative j in time slot t given by U Time slots are definedi jtevery 15 minutes The structure we impose on U is given by thei jtfollowing

( )U s h q Z X b q ai jt t jt i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

( ) v 4q Y D I C s j q e for j s 2 5i net t i t y 1 i jt

v 4 OutU s h q Y g q d I C s 1 q a q e i out t out i out t out out i t y 1 i i out t

v 4 NonU s h q Y g q d I C s 6 q a q e i non t non i non t non non i t y 1 i i non t

where X is an l = l diagonal matrix of individual demographics Zt jtis a 1 = l row vector of show characteristics Special is a dummyjt

14 Based on the characteristics of demand the networks probably choose both how( )many tune-ins to air for each show and where to locate or target these tune-ins Most

previous studies of advertising ignore the targeting issue and focus on the endogene-ity problem arising from the choice of number of ads While this is clearly an issue ofconcern when using aggregate-level data the use of individual-level data avoids thisproblem since the optimal number of tune-ins by networks is not chosen separately foreach individual

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 14: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy376

variable that is equal to one if the show on network j at time t is aspecial and I is the indicator function Y is a vector of show andi net t

individual characteristics such as show continuity and gender Yi out t

and Y are vectors of individual characteristics such as incomei non t

location age education and family size The detailed structure ofutilities is provided in the Appendix

We allow for switching costs in individual behavior as capturedby the parameters d d and the vector of parameters D Forout non

example individuals watching cable TV in a particular time slot maycontinue to watch it in the subsequent time slot due to switchingcosts thus inducing state dependence We estimate the switchingcosts in the decision to watch network TV watch cable TV or notwatch TV at all and allow the switching costs to vary for males( ) (relative to females and for continuation shows ie shows that span

)more than one time slot

The match between individual characteristics15 X and showicharacteristics Z may be an important component of preferences asjt

well For example males may be more likely to watch sports showsteens to watch Beverly Hills 90210 and women to watch shows withfemale casts less action and more romance Such differences inviewing behavior are used to identify the parameters b The choice ofwhich interaction variables for show and individual characteristicsZ X to include is essentially ad hoc16 These variables are definedjt ionly for the various network alternatives j s 2 5

Individuals also may differ in their unobserved preferences a iover various kinds of shows For example some individuals may liketo watch comedies while others prefer dramas Moreover suchheterogeneity may be important even after controlling for simpleobserved differences in preferences across people as captured by X iIf tune-ins for comedies are primarily placed in other comediesviewers who are more likely to watch comedies in the first place willbe exposed to more tune-ins Separating the effects of tune-ins fromthese unobserved differences in preferences is important for obtain-ing unbiased estimates of tune-in effects

15 These include age education gender income and family status here16 A more comprehensive set of interaction variables is included in Shachar and

( )Emerson 1996 Our choice of which variables to include here is motivated in part bythe results of the estimation there

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 15: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 377

We assume a simple discrete distribution for these unobservedpreferences where individuals are any of K types Thus

a with probability pI 1 1

a with probability p2 2

iacutea s i

Ja with probability 1 y p p k ls k l

v Action Comedy Romance SuspenseHere a is a parameter vectormdash a a a a 1 1 1 1 1Fiction4a mdashthat indicates the preferences of individuals of type 1 for1

shows characterized according to their level of action comedy etcsimilarly a represents the preferences of type-2 individuals and so2on The parameters a a a are identifiable if there is any1 2 Ksystematic pattern in the viewing decisions of one group of individu-als relative to others Identification of the probability of each of thesetypes in the population p p p is straightforward1 2 K

The focus of this estimation is on the effects of tune-ins onviewing behavior We measure an individualrsquos exposure to tune-insfor a given show Count simply as the number of ads for that showi jtthat she is exposed to over the week17 A quadratic term in exposureallows for a simple nonlinear structure for the effects of counts onviewing decisions Differences in the decision to watch a show amongindividuals exposed to different counts of tune-ins are used to iden-tify the parameters t and t 1 2

Not all individuals with preferences of a given type a willkwatch exactly the same shows during the week hence there will bevariation in the exposure of tune-ins among individuals of any giventype For example some individuals of type 1 may be exposed tomore tune-ins for a particular comedy than for others of the sametype simply due to idiosyncratic variation in viewing decisions

Similarly there will also be variation in the exposure to tune-ins for aparticular show among individuals of each of the other types Thisvariation allows us to identify the effects of tune-ins after allowing

17 Since the tune-in data are available only for the same week as the shows wereaired there is measurement error in Count For example the shows on Monday willi jthave fewer tune-ins than those later in the week In principle it is possible to estimatea different tune-in parameter t for shows aired on different days of the weekEstimates obtained during a preliminary stage of this researchmdashallowing for lineareffects of tune-ins only and without distinguishing between regular shows andspecialsmdashdid not reveal significant differences in tune-in effects for shows on differentdays In view of these results since we are primarily concerned here with differencesbetween regular shows and specials we do not explicitly correct for this measurementerror when constructing the likelihood function

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 16: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy378

for individualsrsquo preferences to vary in unobserved ways The resultsof the estimation with and without controlling for unobserved het-erogeneity are presented in Section 4 below

In order to estimate the variation in the effects of tune-insaccording to individualsrsquo prior information about a show we sepa-

( )rate shows into two categories specials new one-time shows andregulars Individuals may be presumed to know more about a regularshowrsquos characteristicsmdashits time slot its cast whether it is a comedyetcmdashthan about a special If the effect of tune-ins does not depend ontheir informational content these effects should not differ betweenspecials and regulars ie t s and t s would be equal to t r and t r1 2 1 2Thus this provides a source of identification of the informationalcontent in advertising relative to other effects such as persuasion or

( )signaling Milgrom and Roberts 1986 The informational content of tune-ins may be of two kinds First

tune-ins may simply increase awareness about the existence of ashow Second they may provide information about the showrsquos at-tributes18 Individuals are likely to possess much more informationabout both the existence and attributes of regular shows than aboutthose of specials For regular shows then the role of tune-ins may besimply to serve as reminders of the showrsquos existence and its at-tributes Since most of this information could easily be conveyed viaa few tune-ins the informational value for an individual woulddiminish as the number of tune-ins viewed increases For specialshowever tune-ins may be important both in informing people aboutthe existence of such a show and in conveying information about itsattributes Here a single tune-in is unlikely to be nearly as effectiveinstead a series of tune-ins may be necessary to convey informationabout the different aspects of a new show For the same reasonalthough diminishing marginal effectiveness of tune-ins should applyhere as well the rate at which these returns diminish is likely to besmaller than for regular shows According to this simple characteriza-tion of the informational content in tune-ins the marginal value of

( )tune-ins should be larger for regular shows relative to specials atlow levels of tune-ins but should decline more rapidly as well Moregenerally however the identification strategy is based on the logicthat if tune-ins convey information their effectiveness is likely to

18 A similar distinction between the informational roles of advertising has been( )made in the previous literature Butters 1977 for example focuses on the role of

advertising in conveying information about a productrsquos existence and its price Gross-( )man and Shapiro 1984 augment this to consider information about a productrsquos other

( )attributes such as location as well

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 17: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 379

differ across shows for which viewers possess different preexistingstocks of information We return to a discussion of these differenteffects in our presentation of the results

31 The Likelihood Function

For the econometrician the viewing choice is probabilistic since wedo not observe e The random variables e are assumed to bei jt i jtindependent across individuals i and time slots t having the general-ized extreme-value distribution

1y s6( )1 r 1 y se e1 k( ) ( )F e e s exp y e y e p1 6 ( )( )ks 2

(where e denotes the vector of disturbances for choice j the sub-j)scripts for individuals and timeslots are suppressed here As McFad-

( )den 1978 illustrates under these conditions the viewing choiceprobability is

U1e( )P C s 1 si t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

y s( ) ( )1 r 1 y s 1 r 1 y sU 6 Uj k( ) ( )e p eks 2

( )P C s j s for j s 2 6i t 1 y s( )1 r 1 y sU 6 U1 k( )e q p eks 2

where U s U y e This specification is commonly referred to as thej j j

lsquolsquonested multinomial logitrsquorsquo and relaxes the assumption of indepen-( )dence of irrelevant alternatives IIA imposed by the standard multi-

nomial logit specification For example it appears reasonable toassume that an individual first decides whether or not to watch TVconditional on doing so she then chooses between the various chan-nels The nested logit model we specify here can be thought of ascapturing this two-level representation of the viewing decision More-over since the multinomial logit specification is nested within this

( )model and obtains when s s 0 one can explicitly test which speci-fication better describes the data

( )While the disturbances e are independent across time slotsthe viewing choices are not because of the switching costs Thus theconditional probability of each viewerrsquos history of choices for the

( )entire week C s C C is simply the product of the condi-i i1 iT

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 18: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy380

tional probabilities of each of his or her choices made at each quarterhour That is for a type-k person

Tk k( lt ) ( lt ) ( )f C V a u s P C s j V C a u 31Otildei i it it it i t y 1

ts 1

v 4 (where V s Z X Count Special Y Y Y alli t jt i i jt jt i out t i non t i non t

observed individual and show characteristics as well as the lagged)choices and the vector u includes of all the parameters in the model

other than the a rsquos

Since we do not observe each viewerrsquos type we integrate outthese unobservable preferences The resulting marginal distribution is

Kk( lt ) ( lt ) ( )f C V u a P s f C V u a p 32p2 i i 1 i i k

ks 1

where P is a vector of type probabilities p p for K viewer1 Ktypes

Because the e and the type probabilities are independenti t jacross individuals the likelihood function is simply the product ofthe probabilities of each individualrsquos history of viewing choices Theparameters u a a and P are chosen to maximize the log-like-1 Klihood function given by

N

( ) ( lt ) ( )log L u a P s log f C V u a P 33p 2 i iis 1

where N denotes the number of individuals

The estimates of the structural parameters obtained are dis-cussed below

4 Results

Most of the estimates in Table VII are motivated and discussedelsewhere19 We present them briefly here and then turn to a thor-

( )19 See Shachar and Emerson 1996

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 19: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 381

table VII

Effects of Tune-Ins without Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 04236 00238 h y 07966 006211 ABCrt y 00429 00047 h y 09352 006272 CB Sst 02404 00463 h y 07288 006201 NBCst y 00149 00119 h y 10097 007592 FOX

s 02759 00272 h 00234 00369Sp ecialh y 01373 00322non9

X Kids]b 02007 01148 h y 00317 00408non10

X Teens out]b 02448 01148 h 06733 00914815

X Gen X out]b 03703 00585 h 06459 00862830

X Boom out]b 03549 00549 h 06849 00936845

X Old out]b y 00285 00473 h 05061 00840900

B Kids out]b y 03174 01295 h 07912 00908915

B Teens out]b y 02571 00952 h 08525 00866930

B Gen X out]b 01733 00541 h 09644 00931945

B Boom out]b 03569 00490 h 09323 0082010 00

B Old out]b 01351 00429 h 12245 0096510 15

Fa Fa out]b 03267 00526 h 14854 0093910 30

Fa NoFa out]b 00275 00466 h 14315 0099110 45

b Black]

Income y 02440 00424Fe Fe

]b 00939 00333 d 37657 00563outFe Ma

]b y 00227 00371 d 20182 00808nonM a Fe

]b y 01010 00338 d 12474 00605netM a M a

]b 00177 00360 d 18249 00744contd y 03564 00492sam p

g y 06079 00955 d 04200 00825Kids dram ag 06241 02263 d y 05545 00634Teens new sg y 11669 00919 d y 08934 00685Ge n X sportg y 12977 00929 d y 01093 00172Boom MAg y 15139 00863Oldg 03087 00422Incomeg 00775 00477Educationg y 00041 00375Urban8g y 01308 00380Urban9g y 02476 00356Urban10

nong 03949 00215Basicnong 05182 00245Prem iumnong 06241 02263Teensnong 01499 00219Ma le

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 20: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy382

table VII( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids F Old] ]b 01550 02240 b y 03592 01331

A Teens F Fem ale] ]b 00659 02318 b 01113 00656

A Gen X F Education] ]b y 00736 01623 b y 00984 01455

A Boom R Kids] ]b 00771 01613 b y 02842 02102

A Old R Teens] ]b 00050 01445 b 01819 01838

A Fem ale R Gen X] ]b y 00735 00790 b 02911 01444

A Education R Boom] ]b 03907 01726 b y 00216 01436

C Kids R Old] ]b 05123 01108 b 00351 01325

C Teens R Fem ale] ]b 07446 02113 b 02115 00689

C Gen X R Education] ]b 03239 00875 b y 03061 01489

C Boom S Kids] ]b 03719 00894 b y 03442 02191

C Old S Teens] ]b 01754 00827 b 04525 03347

C Fem ale S Gen X] ]b y 00504 00442 b 02839 01550

C Education S Boom] ]b 03868 00840 b 01793 01541

F Kids S Old] ]b 03692 02011 b 02932 01437

F Teens S Fem ale] ]b 01985 02106 b y 00229 00747

F Gen X S Education] ]b y 04724 01462 b 00938 01619

b F]

Boom y 02680 01479

a Dependent variable decision by individu al i to view alternative j in tim e slot t

ough discussion of the effectiveness of tune-in ads We first report theresults without controlling for differences in unobserved preferencesacross individuals

First note that the estimate of s is significantly different from( )zero s s 028 std error s 003 In other words we can reject theAtilde

simple multinomial logit model in favor of the nested logit specifica-tion

The precise structure of the utility and most of the parameters( )h g d and D are included in the Appendix Briefly we find thatthe utility from the outside alternative is a declining function of ageand is positive in income and education The utility from the nonnet-work alternative is higher for individuals with basic cable and stillhigher for those who subscribe to premium channels Men and teenshave a higher utility from the nonnetwork alternative as well Wealso find strong evidence for switching costs as evidenced by theparameters d In particular the transition propensities of viewersappears to decrease during the finales of dramas men appear toswitch away marginally more than women and older viewers switchslightly less often than younger viewers

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 21: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 383

The b parameters suggest that lsquolsquolikes attractrsquorsquo In particularindividuals prefer shows whose cast demographics are similar totheir own For example shows with a generation-X cast are mostpreferred by generation-X viewers and baby boomers like to watchshows with baby boomers in the cast Similarly viewers prefer towatch shows about people of their own gender and families likeshows about families more than people who live alone Finally

(low-income people prefer shows with blacks in a central role notethat we have used the income variable for individuals as a proxy for

)their race Viewers in different age groups do not differ much in their

preference for lsquolsquoactionrsquorsquo However younger viewers like comedies aswell as shows with a high fiction level Generation-Xers tend to watchromantic shows whereas kids do not Kids also do not like to watchshows with a high element of suspense relative to other viewers

Finally women like watching romantic shows more than men andeducated people like action and comedy but do not appreciateromance

41 Effects of Tune-Ins

We now turn to the effect of the tune-in variables which are the focusof this study We find that the utility from a show is a positiveconcave function of the number of times the individual was exposedto its ads indicating that while tune-ins are effective they havediminishing returns The first exposure to an ad for a regular showincreases the probability of watching the shows by more than 41 the second exposure increases this probability by an additional 29 and the third by about 17 We interpret the strong response to thefirst few ads for regular shows as an awareness effect viewers alreadyknow how much they like a given show and the main purpose of thead is to remind them of the timing of the show for example Notethat one exposure to an ad may not be enough to achieve this effectsince viewers while exposed may often ignore the television duringcommercial breaks Furthermore some people may need more thanone reminder in order not to forget20 Thus the second and the third

( )exposures have a positive but smaller effect on the individualrsquosprobability of watching the promoted show

Figure 1 presents the effect of the Count variable on the utility( ) (from regular shows the solid line and from specials the dashed

)line The difference between these curves is striking While the first

( )20 See also Olney et al 1991

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 22: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy384

FIGURE 1 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

ad for a special is quite effectivemdashit increases the probability ofwatching the shows by about 23 mdashit is not as effective as the firstad for a regular show Since viewers are not familiar with specialsthe first couple of ads obviously do not serve as reminders ratherthey are likely to inform viewers about the showrsquos attributes such asits degree of comedy or action Therefore their effect is not likely tobe as strong as for the regular shows For the same reason howevertheir effectiveness may not diminish as quickly as for regular showsgiven that they serve as sources of information This interpretation isstrongly supported by the data as demonstrated by Figure 1

The sixth tune-in for a regular show and those following it havea negative effect on the viewing probability This effect previouslyrecognized in the advertising literature is referred to as wearout Thereason for wearout may be either that after a while viewers stop

( )attending to the advertising Calder and Sternthal 1976 or thatexcessive exposure generates irritation21

21 The effectiveness of exposures may vary according to their timing as well forexample recent exposures may have a greater effect on an individualrsquos viewingdecisions than those further in the past We have tested this hypothesis and found noevidence of this form of wearout in the data

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 23: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 385

42 Controlling for the Targeting Bias

The estimates of tune-in effectiveness may be biased as discussedabove since the variable capturing an individualrsquos exposure to tune-ins is probably endogenous In order to correct for this we estimate

(the effect of ads while allowing for K-types of viewers as outlined in)Section 3 each with potentially different preferences over the showsrsquo( )attributes such as comedy and action

We report the results of the estimation with six types of viewersin Table VIII22 As expected the effectiveness of tune-ins decreaseswhen we control for unobserved heterogeneity of preferences overthe show types as demonstrated in Figure 2 This confirms the bias inour previous estimates of the effectiveness of ads induced by the

( )networksrsquo targeting strategies However notice that 1 tune-ins are( )still strongly effective and 2 the difference between the effects of

tune-ins for specials and regular shows is similar to that estimatedearlier

The six types of viewers differ substantially in their viewingpatterns These differences can be illustrated by examining the typesrsquodistinct preferences and their viewing choices To infer these choiceswe distribute each individual in our sample to one of the types Theprior distribution for each individual over the various types is de-fined by the estimated probabilities p p Based on their view-1 king history and using Bayesrsquos rule we then estimate the posteriortype probability for each individual and assign her to the group forwhich her posterior type probability is the highest

The types are ordered in Table VIII according to their size23 The( )largest type 312 rarely watch television Only 6 of them watch

the highest-rated show for this type the football game The second( )largest type 223 prefer to watch shows with a high level of

suspense and romance but dislike comedies relative to other types(Thus it is not surprising that their top five shows are ER watched

)by 36 of them the CBS Tuesday Night Movie Beverly Hills 90210(which had relatively high levels of action and suspense during this

)weekrsquos episodes the football game and NYPD Blue Moreover eachof these shows is on a different network indicating that these viewersare not loyal to any particular network Further although Seinfeld is

22 We did not test for a seventh type since adding the fifth and sixth types barelyaffected the estimated tune-in effects

23 Group sizes are based on the estimated probabilities of an individual belongingto each type p p These are calculated directly from the estimates m m in1 6 1 6

m k ( K m k )Table VIII where p s e r 1 q p e for k s 1 6 and m is normalized to 0k ks 1 2

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 24: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy386

table VIII

Effects of Tune-Ins after Correctingafor Targeting Bias

Parameter Coeff Std Error Parameter Coeff Std Error

rt 02817 00218 h y 03568 008661 ABCrt y 00271 00047 h y 04686 008552 CB Sst 01515 00447 h y 02725 008661 NBCst y 00017 00117 h y 05467 009432 FOX

s 03437 00267 h y 00014 00349Sp ecialh y 00766 00308non9

X Kids]b 01874 01078 h 00531 00401non10

X Teens out]b 01981 01081 h 06580 00920815

X Gen X out]b 03529 00552 h 06400 00881830

X Boom out]b 03161 00512 h 06649 00943845

X Old out]b y 00595 00448 h 05166 00856900

B Kids out]b y 03474 01209 h 07920 00925915

B Teens out]b y 02865 00885 h 08797 00887930

B Gen X out]b 01499 00510 h 09714 00942945

B Boom out]b 03187 00459 h 09646 0082410 00

B Old out]b 01251 00410 h 12548 0096210 15

Fa Fa out]b 02937 00518 h 15415 0093810 30

Fa NoFa out]b 00264 00457 h 14911 0099210 45

b Black]

Income y 02367 00392Fe Fe

]b 00670 00314 d 38251 00538outFe Ma

]b y 00478 00362 d 16594 00730nonM a Fe

]b y 01026 00317 d 11345 00578netM a M a

]b y 00008 00338 d 16245 00734contd y 03111 00475sam p

g y 09996 01416 d 03953 00790Kids dram ag y 05950 02496 d y 04910 00614Teens new sg y 17083 01282 d y 07673 00656Ge n X sportg y 18195 01266 d y 01056 00175Boom MAg y 21334 01181Oldg 03235 00766Incomeg 01185 00856Educationg y 00235 00475Urban8g y 01476 00484Urban9g y 02704 00470Urban10

nong 04101 00361Basicnong 05602 00397Prem iumnong 08986 02104Teensnong 01769 00360Ma le

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 25: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 387

table VIII

( )Continued

Parameter Coeff Std Error Parameter Coeff Std Error

A Kids A ction]b 01937 02236 a 01401 014001

A Teens Com edy]b 01650 02305 a 04598 013021

A Gen X Fiction]b y 00656 01651 a 02722 012751

A Boom Rom ance]b 00630 01672 a y 03854 013561

A Old Su spense]b 00342 01516 a 01979 019821

A Fem ale Out]b y 00764 00744 a 17193 014941

A Education Non]b 03736 01680 a 09639 015171

C Kids]b 01314 01492 m 03378 012911

C Teens A ction]b 04152 02287 a 01932 013953

C Gen X Com edy]b y 00868 01225 a 11469 012663

C Boom Fiction]b y 00483 01229 a 03612 012333

C Old Rom ance]b y 03540 01139 a y 06130 013023

C Fem ale Su spense]b y 00645 00515 a 01126 018903

C Education Out]b 02572 01051 a 06302 014493

F Kids Non]b 02804 02003 a y 01078 013673

F Teens]b 01170 01979 m y 04366 019283

F Gen X A ction]b y 05761 01480 a y 03724 020904

F Boom Com edy]b y 03761 01485 a 05388 017134

b F]

Old y 05217 01396 a Fiction 06029 017074F Fem ale Rom ance

]b 00759 00630 a y 04624 016254F Education Su spense

]b y 01878 01401 a 00708 025874R Kids Out

]b y 01527 02193 a 14438 018624R Teens Non

]b 04126 01959 a y 05828 020424R Gen X

]b 04142 01493 m y 06657 017394R Boom A ction

]b 01525 01524 a y 04131 018935R Old Com edy

]b 02640 01432 a 09339 014515R Fem ale Fiction

]b 02514 00677 a 00462 015215R Education Rom ance

]b y 00160 01484 a y 07290 015525S Kids Su spense

]b y 02444 02275 a y 06439 022735S Teens Out

]b 06766 03426 a y 01076 014475S Gen X Non

]b 03690 01741 a y 01996 013595S Boom

]b 03096 01777 m y 07673 021025S Old A ction

]b 03824 01688 a 03193 018326S Fem ale Com edy

]b y 00301 00749 a y 01016 015956S Education Fiction

]b 00194 01606 a 00430 014996Rom ancea y 02205 018506Su spensea y 00609 024726Outa 03020 018726

a Non 09792 017496m y 08578 016196

a Dependent variable decision by individu al i to view alternative j in tim e slot t

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 26: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy388

FIGURE 2 EFFECTS OF PROMOTIONS ON VIEWING DECISIONS

their sixth most popular show they clearly favor dramasmdashSeinfeld isthe only sitcom in their top-ten list

( )The third largest type 144 like sitcoms Except for ER allthe top 15 shows watched by this group are sitcoms Although thistype also have a relatively high level of utility from the outsidealternative they watch network television frequentlymdashfor examplethe tenth highest rated show for this week is watched by 187 ofthem This is probably because network television offers exactly the

( )productmdashsitcomsmdashthat they are looking for The fourth 115 and( )the fifth 10 types like comedy as well The fourth type tend to

watch significantly less TV than the third whereas the fifth type areless tolerant toward nonsitcoms than the other typesmdashthere are no

( )dramas among their top ten shows The last type 94 like actionand dislike comedy It is thus not surprising that their favorite show

( )is the football game with a 17 share Moreover their high nonnet-work utility is probably due to the vast offering of live sport eventson cable TV

To summarize individuals of the first and last types spend lesstime watching network television than the others Individuals oftypes 3 4 and 5 almost only watch sitcoms and type-2 individualsalmost only watch dramas These results suggest that viewers do nottend to prefer a variety of shows and are consistent with the findings

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 27: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 389

( )of Goettler and Shachar 1996 Moreover since the networks fre-quently air a tune-in for a drama during other dramas and for asitcom during other sitcoms the estimate of the tune-in effectivenesswould be upward-biased without controlling for the differences be-tween these types The differences between the other types are ofsignificance as well For example type-1 individuals are less likely towatch any television show and thus are less exposed to tune-ins

Without controlling for differences in preferences between these indi-viduals and others the relationship between the number of exposuresto tune-ins and the propensity to watch television would also influ-ence our estimate of t rsquos

5 Are Network Strategies Optimal

In this section we return to the question that we presented at theoutset do networksrsquo expenditures on advertising exceed the profit-maximizing level To answer this we first present a simple model

( )which we solve for the optimal profit-maximizing number of tune-ins for each show then we compare this with the actual number oftune-ins chosen by the network

Network j should choose the number of tune-ins for show kthat maximizes its expected profit function If the network airs Ck

( )tune-insmdasheach of length L in seconds on averagemdashfor show k itkloses advertising fees that depend on the ratings of the shows duringwhich these tune-ins aired Here we do not solve for the networkrsquosdecision of when to air each tune-in thus we proxy these lostadvertising fees for each tune-in by

P Rating Lj k

where P is the fee that advertisers pay for an expected exposure ofone viewer for one second24 Thus for C tune-ins the networkrsquos lostkfees are P Rating L C We proxy for Rating as the averagej k k j

( )rating of network j over all time slots

The networkrsquos expected revenues from airing C tune-ins forkshow k will depend on the effect of these tune-ins on the ratings for

( lt )that show Let E Rating C denote the expected number of viewersk kfor show k given C Then expected revenues are given byk

( lt )P AD E Rating Ck k k

24 Note that an increase in the amount of tune-in time for a showmdashwhich dependson C mdashreduces the supply of advertising time which may result in a decline in P askwell We ignore this effect here

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 28: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy390

( )where AD is the length in seconds of commercial advertising timekavailable during show k25 Thus the networkrsquos profit function is

( lt ) ( )p s P AD E Rating C y P C L Ratingjk k k k k k j

We substitute for L using actual figures during this week for eachk( lt )show and base E Rating C on our estimation results We thenk k

solve for the profit-maximizing number of tune-ins for each show andeach network26

We estimate the optimal number of tune-ins C U to be 4 forkalmost all the 58 regular shows and higher for all the specials27 Thereason for the lack of variation in C U across the shows can bekexplained as follows From the first-order condition the marginalprofit is equal to zero when

( lt )dE Rating C r dC Lk k k k( )s 51

Rating ADk k

Consider for example this optimization for a sitcom For most such1 (shows L r AD s If the average network rating over all itsk k 30

)shows Rating is close enough to the expected rating for a showj

( )E Rating mdashwhich is indeed the case for most of these showsmdashthenk( )the expression on the left-hand side in equation 51 gives the

percentage effect of the marginal tune-in on the expected rating of theshow For a regular show this was estimated to be 10 of the fourthtune-in and about 0 for the fifth tune-in this suggests that thefourth tune-in would be profitable for almost all sitcoms but the fifthwould not A similar argument holds for nonsitcom regular shows aswell

Without further distinguishing regular shows according to their( )information stock some shows are better known than others and

according to the effectiveness of tune-ins across such shows we(cannot explain the source of actual variation in C It should bek

25 This is equal to 6 minutes for each 30-minute segment26 In reality networks do not advertise their shows on the other networks This is a

rule of the game and we take it as such Examining the logic of this rule is beyond thescope of this study

27 The optimal number of tune-ins for specials is 8 However since the variance ofthe estimate of t s is high the variance of the estimated optimal number of tune-ins is2high as well Notice also that while we estimate the effectiveness of tune-ins forspecials to be a concave function we cannot reject the hypothesis that the effectiveness

(of tune-ins for specials is a linear or a convex function ie we cannot reject thes )hypothesis t G 0 Thus we would not like to make too much of this result2

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 29: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 391

)noted however that this variation is small Our model neverthelesshas two important predictions First regular shows should have asmaller number of tune-ins than specials Second regular showsshould have about 4 tune-ins on average As it turns out networkstrategies are closely consistent with these implications the average

( )number of tune-ins for specials is 5 with a standard deviation of 14 ( )and for regular shows is 38 with a standard deviation of 225 It is

not surprising that observed strategies are consistent with our firstprediction But the consistency with our second prediction is reveal-ing because it indicates that network executives appear to be ontarget in assessing the effect of tune-ins on viewersrsquo choices

The model we have presented here is stylized28 Neverthelessthese results do suggest that network expenditures on advertising aresimilar to the levels that maximize their respective profits

6 Conclusion

While the expenditures on tune-in advertisements by TV networksmay appear excessive we find that they are similar to what ispredicted by a simple model of profit maximization by the networks

Exposure to a maximum of four tune-ins for a show has a dramaticeffect on an individualrsquos decision to watch that show We also findthat the effectiveness of advertising differs between specials andregular shows Since the main difference between these kinds ofshows is in the prior information that individuals possess about eachthis result is indicative of informational content in advertising

While we have established here the value of information inadvertising it would be interesting to examine the nature of thisinformation in more detail The differential effectiveness of advertis-ing between specials and regular shows suggests that advertisingconveys at least two distinct types of informationmdashinformation abouta showrsquos existence and information about its attributes In order toidentify each of these effects it would be useful first to construct a

28 One issue that we have not explicitly modeled for example is the role of( )advertisements as signals see Milgrom and Roberts 1986 according to this shows

with many ads are inferred to be of higher quality which in turn increases thepropensity to watch the show We are not concerned with the signaling hypothesishowever for various reasons First it predicts that the effectiveness of ads shouldincrease with the number of exposures contrary to the wearout effect observed in thedata Second our results rest on the difference in the effectiveness of specials versusregular shows not on the distinction between the persuasive effect and the signalingeffect which may be viewed as one of interpretation Finally clarifying whether adsare signals or simply persuasive though likely to affect the socially efficient level ofadvertisements should not change the implications for profit maximization

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 30: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy392

model that explicitly incorporates the uncertainty about the alterna-tives in an individualrsquos choice set as well as the utility derived fromeach alternative The dataset we use may also be appropriate instructurally estimating such a model The resulting estimates con-cerning the relative importance of each type of information may beuseful in determining a firmrsquos strategy as well as in normativeanalysis

Finally our estimates of the effects of tune-ins allow for thepossibility of networks targeting particular audiences in schedulingtheir tune-ins Since such strategies imply that an individualrsquos expo-sure to tune-ins may be correlated with her unobserved preferencesestimates that do not correct for this endogeneity will be upwardbiased Indeed we find the magnitude of this bias to be large in thecontext of TV tune-ins Similar biases are likely to exist in theestimates obtained from previous studies that analyze the effects ofadvertising on the demand for yogurt beer tobacco and other goodsThe methodology we present in this paper may be extended to theseother contexts

Appendix

Here we present the complete structure of the utility function Firstwe define all the variables that we use

v Variables defining individual characteristicsKids 7 ] 11 years old at November 1995iTeens 12 ] 17 years oldiGen X 18 ] 34 years oldiBoom 35 ] 49 years oldiOld 50 years old and overiIncome On unit interval 0 s less than $10000 020 si

between $10000 and $15000 040 s between$15000 and $20000 060 s between $20000and $30000 080 s between $30000 and $400001 s $40000 and over

Education On unit interval 0 s 0 ] 8 years grade schooli025 s 1 ] 3 years of high school 050 s 4 yearsof high school 075 s 1 ] 3 years of college1 s 4 or more years college

Urban8PM Lives in one of 25 largest metropolitan areas andithe time is between 800 PM and 900 PM

Urban9PM Lives in one of 25 largest metropolitan areas andithe time is between 900 PM and 1000 PM

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 31: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 393

Urban10PM Lives in one of 25 largest metropolitan areas andithe time is between 1000 PM and 1100 PM

Basic Basic cable serviceiPremium Basic and premium serviceiMale MaleiFemale FemaleiFamily Lives with his or her familyi

v Variables defining show characteristicsGen X Show Main characters are between the ages of 18 and 34jtBoom Show Main characters are between the ages of 35 and 49jtFamily Show Main characters are members of a familyjtMale Show Main characters are malejtFemale Show Main characters are femalejtBlack Show Main characters are blackjt

v Variables concerning show continuity( )Continue Show continuity middle of showjt

Sample First quarter hour of showjtDrama Last quarter hour of dramajtSports Sports showjtNews News showjtHour Break The 900 and 1000 breaks for the nonnetworkjt

alternative

Next we present the specific structure of the utilities

U s h q Kids g Kids q Teens g Teens q Gen X g Gen Xi out t out t i i i

q Boom g Boom q Old g Oldi i

q Income g Income q Education g Educationi i

q Urban8PM g q Urban9PM gi Urban8 i Urban9

v 4q Urban10PM g q d I C s 1i Urban10 out i t y 1

q a Out q e i i out t

v 4U s h I 9 PM F t - 10 PM q hi non t non 9 non 10

v 4 I 10 PM F t - 11 PM

q Basic g non q Premium g noni Basic i Premium

non non v 4q Male g q Teens g q d I C s 6i Male i Teens non i ty 1

q a Non q e i i non t

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 32: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy394

U s h q h Special Speciali j t j jt

( X]

Kids X]

Teensq Gen X Show Kids b q Teens bjt i i

X]

Gen X X]

Boom X]

Old )qGen X b q Boom b q Old bi i i

( B]

Kids B]

Teensq Boom Show Kids b q Teens bjt i i

B]

Gen X B]

Boom B]

Old )qGen X b q Boom b q Old bi i i

qFamily Showjt

Fa Fa Fa NoFa] ]( ) Family b q 1 y Family bi i

qBlack Show Income b Black]

Incomejt i

( Fe]

Fe Fe]

Ma )qFemale Show Female b q Male bjt i i

( Ma]

Fe Ma]

Ma )qMale Show Female b q Male bjt i i

( A]

Kids A]

TeensqAction Kids b q Teens bjt i i

qGen X b A]

Gen X q Boom b A]

Boom q Old b A]

Oldi i i

A]

Female A]

Education Action )qFemale b q Education b q ai i i

( C]

Kids C]

TeensqComedy Kids b q Teens bjt i i

qGen X b C]

Gen X q Boom b C]

Boom q Old b C]

Oldi i i

C]

Female C]

Education Comedy )qFemale b q Education b q ai i i

( F]

Kids F]

TeensqFiction Kids b q Teens bjt i i

qGen X b F]

Gen X q Boom b F]

Boom q Old b F]

Oldi i i

F]

Female F]

Education Fiction )qFemale b q Education b q ai i i

( R]

Kids R]

TeensqRomance Kids b q Teens bjt i i

qGen X b R]

Gen X q Boom b R]

Boom q Old b R]

Oldi i i

R]

Female R]

Education Romance )qFemale b q Education b q ai i i

( S]

Kids S]

TeensqSuspense Kids b q Teens bjt i i

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 33: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

The Effectiveness and Targeting of Television Advertising 395

qGen X b S]

Gen X q Boom b S]

Boom q Old b S]

Oldi i i

S]

Female S]

Education Suspense )qFemale b q Education b q ai i i

r r 2 ( )q t Count q t Count 1 y Special( )1 i jt 2 i jt jt

q t s Count q t s Count2 Special( )1 i jt 2 i jt jt

(q d q d q d Sample q d Newsnet cont sample jt news jt

)q d Drama q d Sport q d Male Continuedrama jt sport jt MA i jt

v 4 I C s j q e for j s 2 5i t y 1 i jt

References

Ackerberg D 1995 lsquolsquoAdvertising Learning and Consumer Choice in ExperienceGood Markets An Empirical Examinationrsquorsquo Working Paper Boston University

Batra R DR Lehmann J Burke and J Pae 1995 lsquolsquoWhen Does Advertising Have an( )Impact A Study of Tracking Datarsquorsquo Journal of Advertising Research 35 5 19 ] 32

Berndt E 1991 lsquolsquoCausality and Simultaneity between Advertising and Salesrsquorsquo in ThePractice of Econometrics New York Addison-Wesley Chapter 8

Butters GR 1977 lsquolsquoEquilibrium Distributions of Sales and Advertising Pricesrsquorsquo( )Review of Economic Studies 44 3 465 ] 491

Calder B and B Sternthal 1976 lsquolsquoTelevision Commercial Wearout An InformationProcessing Viewrsquorsquo Journal of Marketing Research 13 173 ] 186

Galbraith JK 1967 The New Industrial State Boston Houghton-Mifflin

Goettler R and R Shachar 1996 lsquolsquoEstimating Show Characteristics and SpatialCompetition in the Network Television Industryrsquorsquo Working Paper Series H No 5Yale School of Management December

Grossman G and C Shapiro 1984 lsquolsquoInformative Advertising with Differentiated( )Productsrsquorsquo Review of Economic Studies 51 1 63 ] 81

McFadden D 1978 lsquolsquoModelling the Choice of Residential Locationrsquorsquo in A Karlquistet al eds Spatial Interaction Theory and Residential Location North-Holland Amster-dam

Milgrom P and J Roberts 1986 lsquolsquoPrice and Advertising Signals of Product QualityrsquorsquoJournal of Political Economy 94 796 ] 821

Olney T M Holbrook and R Batra 1991 lsquolsquoConsumer Responses to Advertising TheEffects of Ad Content Emotions and Attitude toward the Ad on Viewing Timersquorsquo

( )Journal of Consumer Research 17 4 440 ] 453

Rao AG and PB Miller 1975 lsquolsquoAdvertising r Sales Response Functionsrsquorsquo Journal of( )Advertising Research 15 2 7 ] 15

Resnik A and BL Stern 1978 lsquolsquoAn Analysis of Information Content in TelevisionAdvertisingrsquorsquo Journal of Marketing 41 50 ] 53

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press

Page 34: The Effectiveness and Targeting of Television · PDF fileThe Effectiveness and Targeting of Television Advertising 365 kinds of shows.If there were no informational content in advertising,

Journal of Economics amp Management Strategy396

Roberts MJ and L Samuelson 1988 lsquolsquoAn Empirical Analysis of Dynamic Nonprice( )Competition in an Oligopolitistic Industryrsquorsquo Rand Journal of Economics 19 2

200 ] 220

Shachar R and J Emerson 1996 lsquolsquoHow Old Should Seinfeld Bersquorsquo Working Paper YaleSchool of Management

Simon J and J Arndt 1980 lsquolsquoThe Shape of the Advertising Response Functionrsquorsquo( )Journal of Advertising Research 20 4 11 ] 28

Solow R 1967 lsquolsquoThe New Industrial State or Son of Affluencersquorsquo Public Interest 9100 ] 108

Tellis GJ and DL Weiss 1995 lsquolsquoDoes TV Advertising Affect Sales The Role of( )Measures Models and Data Aggregationrsquorsquo Journal of Advertising 24 3 1 ] 11

Tirole J 1989 The Theory of Industrial Organization Cambridge MA The MIT Press