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Abstract

Consider a display ad for a new pizza brand that announces a discount. Such discount advertising mentions the brand and often shows a picture of the product, thus informing consumers of the brand and some characteristics (the 'brand advertising effect'). It also highlights a discount, thus informing consumers of the existence of a discount (the 'pure promotion effect'). There could be a third effect, the 'discount spotlighting effect' - a reduction in brand preference from discount advertising that arises from the brand choosing to highlight a discount in its advertising and marketing itself based on low price. These three effects are typically confounded and, in particular, the 'discount spotlighting' effect has not been studied before. Two identical consumers, one who has seen a brand ad and then found out about the discount separately, and another one who has seen a discount ad, have the same information about the brand and the discount. However, they will have different probabilities of purchase due to the 'discount spotlighting' effect. I demonstrate the existence of this effect by designing and implementing a field experiment on a food delivery app with exogenous variation in advertising intensity, the presence of discount information in ads, and discount level for a focal restaurant. More broadly, I use this experiment to investigate the differences in the effects of ads with and without explicit discount information ('discount ads' and 'brand ads') on demand for the advertised brand and the different stages of the purchase funnel (search and purchase). I show that discount ads can induce more consumers to search for the product, but result in lower conversion to purchase conditional on search for a given consumer, relative to brand ads. Further, I show that targeting different consumers with brand ads or discount ads along with targeted discounts based on their probability of search and conditional purchase increases firm revenues relative to a single, optimal type of ad and discount level.

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