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On Advertising

Posted on November 17, 2010 | Author: Alvin J Silk | View 678 | Comment : 1

From 1982 through 2007, US advertising agencies increasingly unbundled,or disaggregated, services such as copywriting and media placement, moving away from the industry's traditional onestop-shop model.At the same time, agencies began to charge clients based on a fee-forservice system, rather than collecting commissions on media placements.We address a longstanding puzzle surrounding the unbundling of services occurring over several decades in the US ad agency industry: What accounts for the shift from bundling to unbundling of services and the slow pace of change?We develop a simple model of an agency's decision to unbundle as a tradeoff between the fixed cost to the advertiser of establishing a relationship with an agency and pecuniary economies of scale available from providing media services.The key predictions of the model are supported by an econometric analysis of cross-sectional and pooled data...Agencies are more likely to unbundle services with increasing size and diversification but are less likely to do so with increasing age.A strong trend toward unbundling over time is evident, a result partially explained by increases in media prices during the study period.With the arrival of new media technologies and lower-priced digital ads, holding companies are considering reorganising their media agencies with digital and other capabilities so as to position themselves as offering clients broader marketing solutions beyond media planning and buying.

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