REVISION: How and When to Use the Political Cycle to Identify Advertising Effects
A central challenge in estimating the causal effect of TV advertising on demand is isolating quasi-random variation in advertising. Political advertising, which topped $14 billion in expenditures in 2016, has been proposed as a plausible source of such variation and thus a candidate for an instrumental variable. We provide a critical evaluation of how and where this instrument is valid and useful across categories. We characterize the conditions under which political cycles theoretically identify the causal effect of TV advertising on demand, highlight threats to the exclusion restriction and monotonicity condition, and suggest a specification to address the most serious concerns. We test the strength of the first stage category-by-category for 274 product categories. For most categories, weak-instrument robust inference is recommended, as first-stage F-statistics are less than 10 for at least 221 of 274 product categories in our benchmark specification. The largest first-stage ...
REVISION: Politics, Persuasion and Choice
In the past decade, we have seen a certain convergence between politics and marketing, in sometimes unexpected ways. Political campaigns now routinely use marketing tools to persuade voters. Brands, on the other hand, are engaging with increasing likelihood with explicitly-political movements of interest to their customers. Moreover, both fields have long had an ambivalent relationship with the concept of truth and, as a result, we typically observe significant variation across individuals’ beliefs over optimal choices. In this paper, we report on, summarize, and extend our discussions at the 2019 Choice Symposium in which our session had diverse representation from marketing, economics and practice. We organize our ideas around three dimensions of political beliefs: 1) What are the characteristics of political beliefs?, 2) Who drives beliefs in the political setting and how? 3) What mechanisms facilitate truthful outcomes?
New: Market Structure and Competition: Evidence from a Natural Experiment in Liquor Licensure
Washington state licensed private retailers to sell spirits for the first time in May 2012, but only if their premises exceeded 10,000ft. This restriction generates exogenous variation in the number of retailers across local liquor markets, which we leverage to estimate the causal effects of market structure on equilibrium outcomes. We find that spirits purchasing increases by 63% when moving from monopoly to duopoly markets, and that this increase is concentrated among the heaviest-drinking households. These results support the notion that local liquor availability can dramatically increase consumption. However, these effects dissipate quickly as the number of competitors increases, highlighting that the square-footage based licensure rule is a blunt policy tool. Surprisingly, price competition does not play an important role in the observed quantity increase. Instead, we find that firms compete in product assortment, tailoring product mix to the local competitive environment while ...
Update: Estimating the Effect of Potential Entry on Market Outcomes Using a Licensure Threshold
We study the effects of potential entry on market outcomes in the context of Washington state's 2012 switch from a state-run monopoly to private liquor sales. Concern about alcohol-related crime prompted regulators to institute a 10,000 square foot licensure requirement to curtail entry. This store size threshold generates plausibly exogenous variation in the number of eligible entrants in local liquor markets across the state. We find that widening the pool of potential entrants has a small effect on pricing, but a significant effect on product offerings. In particular, markets with more potential entrants see a compositional shift in product offerings towards cheaper goods. Further, we find that the size requirement changes the composition of entrant size, rather than the aggregate number of entrants.
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