the diffusion of television advertising

Review of Industrial Organization 6: 283-290, 1991 0 1991 Kluwer Academic Publishers. Printed in the Netherlands.

The Diffusion of Television Advertising

MICHAEL R. BUTLER Texas Christian University, Department of Economics, Box 32876, Fort Worth, TX 76129, U.S.A.

Abstract. This study is an empirical examination of the diffusion of the use of network television advertising by manufacturing firms. The results indicate that manufacturers of consumer goods were likely to make use of television advertising sooner than manufacturers of producer goods and that, among producers of consumer goods, those producing more easily differentiable products were likely to adopt sooner than those producing more standardized products. Manufacturers of products sold in larger geographic markets were found to adopt sooner than those producing products sold in smaller markets. Larger market share was also found to induce earlier adoption of television advertising.

Key words. Innovation diffusion, television advertising.

1. Introduction

Over the years, economists have devoted a great deal of attention to questions concerning the rate of diffusion of technological innovations. I One innovation which has not previously been the subject of this attention is network television. This study is an empirical examination of the diffusion of the use of network television advertising by manufacturing firms. By treating television advertising as a technological innovation the paper seeks to establish causal links between elements of market structure and the timing of the firm’s decision to adopt network television as an advertising medium.

The use of network television as an advertising medium grew remarkably in the first decade after its introduction. Expenditures on television advertising grew from near zero in 1947 to over $1.3 billion in 1958, by which time the percentage of all expenditures in five major advertising media going to television advertising had risen to over 16 per cent. If expenditures on newspaper advertising are separated as being primarily informative, the percentage of all ‘persuasive’ advertising taking place through network television had risen to over 46 per cent by 1958. A second way in which to consider the growth of television advertising is to look at the number of firms making use of the medium. The number of network television advertisers increased from 71 in 1949 to 321 in 1956, a nearly fivefold increase.’

Despite this tremendous growth in its use and the undeniable importance of television advertising, there has been surprisingly little research in the economics

284 MICHAEL R. BUTLER

literature dealing specifically with television advertising. In particular, there has been no previous attempt to determine those factors of importance in determining the timing of the firm’s decision to adopt this new innovation. This study seeks to narrow this gap in the existing literature on the economics of advertising.

2. The Model

The measure of the rate of diffusion used in this study is the time to first adoption of network television advertising by manufacturing firms. Of primary interest, of course, is the role of market structure as a determinant of the rate of diffusion. Romeo (1975) finds that the rate of diffusion of numerically controlled machine tools was slower in more concentrated industries. Conversely, Hannan and McDowell (1984) find that the rate of diffusion of ATMs was faster in more concentrated banking markets, while Levin et al. (1985) report similar results for the diffusion of optical scanners in the food store industry. This paper employs measures of both firm market share and industry concentration in order to assess the importance of structural characteristics on the rate of diffusion of television advertising.

In addition to the importance of market structure as a determinant of the timing of the adoption decision, the role of a number of additional firm and industry characteristics is examined. Mansfield (1968) suggests that an innovation shouId diffuse more quickly (or, in our case, be adopted earlier) the greater the profitability of the innovation and the lower the risk associated with its adoption.

Undoubtedly, the most important factors influencing the profitability of network television advertising are the characteristics of the firm’s product. While these product characteristics may often be difficult to quantify for use in an empirical study, there are a number of specific characteristics which might be expected to influence the firm’s expected returns from television advertising. In general the profitability of network television advertising should be greater for a firm advertising a product sold on a national market, which is purchased by a large fraction of the consuming public, and which lends itself to advertising-induced product differentiation. We would predict, therefore, that firms which operate on a national (or at least large regional) scale would adopt television advertising sooner than firms which operate in smaller regional or local markets. Second, we would predict that manufacturers of consumer goods would adopt sooner than manufacturers of producer goods. Third, we would predict that firms which produce products which lend themselves to advertising-induced product (or image) differentiation would choose to advertise on network television earlier than firms producing more standard, less easily differentiable products.

Firm size could also be expected to affect the profitability of, or risk associated with, the adoption of network television advertising. Larger firms might be more likely than smaller firms to adopt network television advertising for two reasons.

THE DIFFUSION OF TELEVISION ADVERTISING 285

First, larger firms are more likely to be involved in the production of a wide range of products, thereby increasing the likelihood that it will be profitable to advertise at least some of its product line on network television. Second, a larger firm would have more resources available to finance expenditures on television advertising and would be better able to absorb a loss should the use of the medium not prove to be successful.

Finally, firm diversification might be expected to affect the expected profitability of network television advertising and, therefore, influence the timing of the firm’s decision to adopt. The more diverse are a firm’s product offerings, the greater the likelihood that the firm will find it profitable to utilize television as an advertising medium.

3. The Data and Variables

The sample consists of 157 firms for which the date of adoption of television advertising could be determined and for which data could be obtained for the independent variables described above. The dependent variable (TIME- TO-ADOPT) used in the empirical section which follows is the length of time (in years) between 1948 (the first year for which firm-specific data on television advertising were available) and the date at which each firm first made use of network television advertising. Each of the 157 firms included in the sample was assigned to the four-digit industry in which its value of shipments (in 1950) was largest.

A series of dummy variables was included to capture the effects of relevant product characteristics. Firms were initially classified as being primarily producers of consumer or producer goods, using the classification scheme of Ornstein (1977). Firms classified as being producers of consumer goods were further delineated into three classes according to their “potential profitability (differentiability by means) of advertising”, using the classification scheme introduced by Greer (1971). These classes, in ascending order of potential profitability, are: (1) standard ‘convenience’ goods, (2) ‘specialty’ or ‘shopping’ goods, and (3) ‘specialty-convenience’ goods. For regression purposes, a series of dummy variables (DUMPRODI, DUMPROD2, and DUMPROD3) is used. Each dummy variable takes the value of one for firms assigned to that class and zero otherwise.

The specific distribution of consumer goods among the classes is as follows. Class I: Fresh meats, prepared meat products, canned foods and sauces, miscel- laneous foods, cotton and rayon fabrics, and footwear. Class II: Distilled liquor, furniture, carpets and rugs, tires and tubes, razors and blades, household ma- chines, electrical appliances, radios and televisions, motor vehicles, watches and clocks, and silverware.3 Class III: Cereal breakfast foods, confectionery, chewing gum, beer, cigarettes, cigars, soaps, detergents, and hair preparations.


Table I. Descriptive statistics.

Variable Mean St. Dev.

TIME-TO-ADOPT 5.10 7.43 SHARE 16.60 14.92 CR4 47.08 21.78 FIRMSIZE 3.92 9.19 DIV 9.41 9.01 MKTS 2.47 2.41

No. of firms assigned to each product class:

Producer a Consumer Class 1 26

Class 2 43 Class 3 28

Other independent variables included in the empirical section which follows are:

SHARE - defined as the firm’s market share in its primary industry for the year 1950;

CR4 - defined as the four-firm concentration ratio in 1947 for the firm’s primary industry;

FZRMSZZE - defined as the firm’s total value of shipments (in hundreds of million of dollars) for the year 1950;

DZV - defined as the number of four-digit industries in which the firm was operating in 1950; and

MKTS - defined as the number of theoretical markets in the Continental United States for the firm’s primary industry.4

Descriptive statistics for the sample appear in Table I.

4. Empirical Results

Column 1 of Table II presents the results of the regression model. Since the sample was left-censored (with 32 firms having adopted in 1948 or sooner) the model was estimated using the Tobit estimating technique.

As expected the characteristics of the firm’s primary product are the most important determinants of the timing of the firm’s decision to utilize network television advertising. Each of the product characteristic dummy variables is significantly different from zero at at least the 0.05 level, indicating that producers of consumer goods were likely to adopt network television advertising sooner than producers of producer goods. Among producers of consumer goods, however, there appears to be little difference between the predicted adoption dates of firms producing in the various classes of consumer goods, with firms assigned to Class 2 (specialty or shopping goods) and Class 3 (specialty-convenience goods) being expected to adopt about two and one half to three years sooner than firms assigned to Class 1 (standard convenience goods).5


Table II. Tobit results. Denendent variable: vears-to-adont.

Variable name (1) (2) (3)

Constant

DUMPRODl

DUMPRODZ

DUMPROD

SHARE

CR4

FIRMSIZE

DIV

MKTS

‘R2’

Likelihood Ratio Test

1.8497” (3.386)

-5.1563b (2.508)

-7.5238” (4.292)

-8.1967” (3.974)

-0.0974’ (1.874) 0.0211

(0.566) -0.0711 (0.634)

-0.0164 (0.158) 0.5849b

(2.136) 0.1484

33.396”

7.8009” (3.396)

-5.1832b (2.529)

-7.4894” (4.307)

-8.1063” (4.094)

-0.0984’ (1.906) 0.0198

(0.545) -0.0813 (0.879)

0.580gb (2.130) 0.1479

33.371”

7.8817a (3.406)

-5.0612b (2.471)

-7.6303” (4.385)

-8.2878’ (4.037)

-0.0990’ (1.909) 0.0238

(0.645)

-0.0554 (0.661) 0.5873b

(2.147) 0.1534

32.974”

“Statistically significant at the 0.01 level. bStatistically significant at the 0.05 level. ‘Statistically significant at the 0.10 level. ‘R2’ is the squared correlation between observed and expected values. Likelihood Ratio Test is distributed as Chi-squared with degrees of freedom equal to the number of explanatory variables. Absolute value of asymptotic t-ratio in parentheses.

Considering the market structure variables, the estimated coefficient on market share is negative and is significantly different from zero at the 0.10 level. The magnitude of this coefficient, however, does not appear to reflect a very large effect of market share on the timing of the firm’s adoption decision, with an increase in market share of over ten points being required in order for adoption to be predicted to occur just one year earlier. The coefficient on market concentration is positive, but insignificantly different from zero.

The coefficient on the geographical extent of the market is positive, as expected, and is statistically different from zero at the 0.05 level of significance, indicating that firms producing goods sold in national markets adopted television advertising sooner than those operating in smaller, regional markets.

The coefficient on firm size is, as expected, negative, but is also not significantly different from zero, indicating that while larger relative firm size, as measured by market share, resulted in earlier adoption of television advertising, absolute firm size has no significant bearing on the timing of the adoption decision. Similarly, the coefficient on firm diversification was negative but insignificant. Since these two variables are fairly highly collinear (with a simple correlation coefficient of


0.62), the model was re-estimated with both FZRMSZZE and DZV entered individ- ually. These results appear in columns 2 and 3 of Table II. In neither case are the estimated coefficients significant, while the other coefficients remain virtually unchanged.6

The results reported here are quite consistent with those of Hannan and McDow- ell (1984) and Levin et al. (1985), each of whom found faster rates of innovation diffusion in more concentrated markets. While market concentration was not found to significantly affect the timing of adoption of network television advertising, larger market share was found to result in earlier adoption. Other variables found to significantly affect the timing of the adoption decision were certain product characteristics and the geographic extent of the market, both of which would be expected to impact on the expected profitability of the innovation.

5. Summary and Conclusions

For the most part, the results of the statistical estimation reported here are consistent with earlier research establishing a link between elements of market structure and the timing of the adoption of an innovation. Not surprisingly, the most important determinants of the timing of adoption of television advertising seem to be the characteristics of the firm’s product(s) and the extent of the geographical market in which the firm operates. The results indicate that producers of consumer goods were likely to make use of television advertising sooner than producers of producer goods and that, among producers of consumer goods, those producing more easily differentiable products were likely to adopt sooner than those producing more standardized products. Similarly, producers of products sold in national or large regional markets were found to adopt sooner than those producing products sold in smaller regional or local markets.

Among the market structure variables, larger market share was found to induce earlier adoption of television advertising. These results tend to corroborate earlier findings that television advertising, in particular, has led to increased market concentration in many consumer goods industries, as has been suggested by Blair (1972) and Mueller and Rogers (1980). To the extent that network television advertising is an effective means of maintaining or increasing market share, the earlier adoption by leading firms very likely played a significant role in the changing structure of industry in the post-war era.

Acknowledgments

I would like to thank John F. Stewart, Robert H. Lee, an anonymous referee,


and the editor. William G. Shepherd, for helpful comments. Responsibility for any remaining errors, however, is my own.

Notes ’ See. for example. Mansfield (1963. 1968. and 1973). Romeo (1975). Brown (1981), Hannan and McDowell (198-l). and Levin. Levin. and Meisel (1985). ’ Bogart (1972. p. 193). -’ Although firms in the distilled liquor industry no longer advertise on television, several liquor firms were among the earliest users of network television advertising. As a result, those firms who had adopted by 1952 were included in the sample. while those who had not were not. ’ Data for the variables SHARE. FIRMSIZE. and DIV were obtained from FTC (1972); for CR4

from FTC (195-t): and for MKTS from Weiss (1972). ’ Tests of the equality of the coefficients on DUMPRODI, DUMPRODZ. and DlJMPROD3 were unable to reject the null hypothesis that the coefficients were equal, using either pairwise t-tests or a joint F-test. ’ The model was also estimated using a continuous industry advertising-to-sales ratio (taken from Ornstein. 1977) in place of the series of dummy variables. These results appear in Appendix Table AI and are broadly similar to those discussed above, although at a lower level of significance

References Blair. John M. (1972) Economic Concentration: Strttcture, Behavior and Public Policy. New York:

Harcourt Brace Jovanovich. Bogart. Leo (1972) The Age of Television: A Study of Viewing Habits and the Impact of Television on

American Life. 3rd ed. New York: Frederick Ungar Publishing. Brown. Lawrence A. (1981) /nno\jation Diffitsion: A New Perspective. New York: Metheun. Greer. Douglas F. (1971) ‘Advertising and Market Concentration’, Southern Economic Journal 38,

19-32. Hannan. Timothy H. and McDowell. John M. (1984) ‘Market Concentration and the Diffusion of New

Technology in the Banking Industry’, Review of Economics and Statistics 66. 686-691. Levin. Sharon G.. Levitt. Stanford L.. and Meisel. John B. (1985) ‘Intermarket Differences in the

Early Diffusion of an Innovation’. Southern Economic Journal 51, 672-680. Mansfield. Edwin (1963) ‘Intrafirm Rates of Diffusion of an Innovation’, Review of Economir.y arid

Stati.stic.~ 45, 348-359.

Mansfield, Edwin (1968) lndrtstrial Research and Techno/ogica( Innovation. New York: W. W. Norton. Mansfield, Edwin (1973) ‘Determinants of the Rate of Application of New Technology, in Williams

B. R. (ed.). Science und Technology in Economic Growth. New York: John Wiley & Sons. Mueller. Willard G. and Rogers, Richard T. (1980) ‘The Role of Advertising in Changing Concentra-

tion of Manufacturing Industries’. Review of Economics and Statistics 62, 89-96.

Ornstein, Stanley I. (1977) lndttsrrial Concentration and Advertising Intensity. Washington: American Enterprise institute.

Romeo, Anthony A. (1975) ‘Interindustry and Interfirm Differences in the Rate of Diffusion of an Innovation’, Review of Economiu and Stati.~tics 57, 31 l-319.

U.S. Federal Trade Commission (1954) Report of the Federal krade Commission on Changes in

Concentration in Manufacturing lY.35 to lY47 and 1Y.V). Washington: U.S. Government Printing Office.

U.S. Federal Trade Commission (1972) Stutktical Report, Value of Shipments Data by Product Class

for 1000 Lorge.st Manufucturing Companies for 1Y-50. Washington: U.S. Government Printing Office. Weiss, Leonard W. (1972) ‘The Geographic Size of Markets in Manufacturing’. Review of Economics

and Stutirticv 54. 245-266.


Appendix Table AI. Tobit results. Dependent variable: years-to-adopt.

Variable name (1) (2)

Constant 3.2164 3.3386 (1.416) (1.483)

AD-TO-SALES -o.so74b -0.5205b (2.413) (2.489)

SHARE -0.0854 -0.0835 (1.458) (1.430)

CR4 -0.0336 0.0374 (0.807) (0.924)

FIRMSIZE -0.1021 -0.0759 (0.880) (0.797)

DIV 0.0481 (0.403)

MKTS 0.681gb 0.6965b (2.185) (2.247)

GR2’ 0.0765 0.0787 Likelihood Ratio Test 14.010b 13.84gb

(3)

7.8817” (3.406)

-0.5121 (2.423)

-0.0888 (1.519) 0.0371

(0.896)

-0.0138 (0.142) 0.6874b

(2.205) 0.0860

13.199b

?Statistically significant at the 0.01 level. bStatistically significant at the 0.05 level. Statistically significant at the 0.10 level. ‘R*’ is the squared correlation between observed and expected values. Likelihood Ratio Test is distributed as Chi-squared with degrees of freedom equal to the number of explanatory variables. Absolute value of asymptotic t-ratio in parentheses.

the diffusion of television advertising

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