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Advertising and Risk Selection in Health Insurance Markets
We study impacts of advertising as a channel of risk selection in Medicare Advantage. We show evidence that both mass and direct mail advertising are targeted to achieve risk selection. We develop and estimate an equilibrium model of Medicare Advantage with advertising to understand its equilibrium impacts. We find that advertising attracts the healthy more than the unhealthy. Moreover, shutting down advertising increases premiums by up to 40% for insurers that advertised by worsening their risk pools, which further reduces the demand of the unhealthy. We argue that risk selection may make consumers better off by improving insurers' risk pools.
AUTHORS: Kim, You Suk; Aizawa, Naoki
Consumer Mistakes and Advertising : The Case of Mortgage Refinancing
Does advertising help consumers to find the products they need or push them to buy products they don't need? In this paper, we study the effects of advertising on consumer mistakes and quantify the resulting effect on consumer welfare in the market for mortgage refinancing. Mortgage borrowers frequently make costly refinancing mistakes by either refinancing when they should wait, or by waiting when they should refinance. We assemble a novel data set that combines a borrower's exposure to direct mail refinance advertising and their subsequent refinancing decisions. Even though on average borrowers would lose approximately $500 by refinancing, the average monthly exposure of 0.23 refinancing advertisements reduces the expected net present value of mortgage payments on average by $13, because borrowers who should refinance are targeted by advertisers and more responsive to advertising. A counterfactual advertising policy that redirects all advertising to borrowers who should refinance would increase the gain in borrower welfare to $45.
AUTHORS: Grundl, Serafin J.; Kim, You Suk
Underestimating advertising: innovation and unpriced entertainment
Leonard Nakamura states that despite consumers? lack of respect for advertising, it nonetheless plays a significant role in the economy. For one thing, it helps consumers find out about new products, and new products have been rising in economic importance. It also plays a role in subsidizing broadcast entertainment and news programs. Ultimately, Nakamura shows that although advertising contributes to consumer welfare, its contribution is missing from our measures of output.
AUTHORS: Nakamura, Leonard I.
When you can't go see somebody: advertising to business
AUTHORS: Campbell, John
Advertising and pricing at multiple-output firms: evidence from U.S. thrift institutions
We derive five hypotheses regarding market competition, price, and advertising from a theoretical model of a profit maximizing depository institution, and test these conjectures in a simultaneous system of deposit interest rates and advertising expenditures for a data panel of 1,867 thrift institutions that offer 13 different deposit products in 666 local markets in the U.S. between 1994 and 2000. We find some support for each of our hypotheses ? branding, information, Dorfman-Steiner, structure-advertising, and structure-price ? with the strength of the results often depending on the attributes of the deposit products or the characteristics of the thrifts.
AUTHORS: DeYoung, Robert; Evren Örs
Advertising, market power and non-price competition: evidence from commercial banking
AUTHORS: Wolken, John D.; Derrick, Frederick W.
Valuing “free” media across countries in GDP
?Free? consumer entertainment and information from the Internet, largely supported by advertising revenues, has had a major impact on consumer behavior. Some economists believe that measured gross domestic product (GDP) growth since 2000 is too low because it excludes online entertainment (Brynjolfsson and Oh 2012; Ito 2013). Similar large effects on consumers occurred with the arrival of free radio and television entertainment. We provide an experimental methodology that uses previously established GDP measurement procedures to value advertising-supported entertainment around the world. The experimental method raises global real GDP growth, but the increase is small. It is true that advertising-supported online entertainment has grown dramatically since 2000. Concurrently, advertising-supported print entertainment has been stagnant. The net impact is a real growth rate of 7.6% per year for advertising-supported entertainment. Furthermore, advertising-supported entertainment accounts for less than 0.5% of global GDP. As a result, our experimental methodology only raises overall real GDP growth by 0.019% per year. Across countries, the experimental methodology raises nominal inequality. In 2011, nominal GDP for nations in the Organisation for Economic Co-operation and Development (OECD) increased by 0.18% more than nominal GDP in the rest of the world. Furthermore, nominal GDP in the United States increased 0.22% more than GDP in the rest of the OECD countries. However, prices for advertising-supported entertainment are also higher in wealthier nations. The net impact is a small reduction in real inequality.
AUTHORS: Nakamura, Leonard I.; Soloveichik, Rachel
Advertising, intangible assets, and unpriced entertainment
This paper addresses two aspects of advertising: its role in supporting entertainment and news, and its role as an investment. The author argues that in both roles advertising?s contribution to output is being undermeasured in the national income accounts. In some cases one unit of nominal advertising input should be counted as two units of real output. In rough orders of magnitude, he argues that it is plausible that two-thirds of advertising expenditure represents unmeasured contributions to output, and the level of real GDP should be increased accordingly.
AUTHORS: Nakamura, Leonard I.
Valuing \\"Free\\" Media in GDP: An Experimental Approach
?Free? consumer entertainment and information from the Internet, largely supported by advertising revenues, has had a major impact on consumer behavior. Some economists believe that measured gross domestic product (GDP) growth is badly underestimated because GDP excludes online entertainment (Brynjolfsson and Oh 2012; Ito 2013; Aeppel 2015). This paper ntroduces an experimental GDP methodology that includes advertising-supported media in both final output and business inputs. For example, Google Maps would be counted as final output when it is used by a consumer to plan vacation driving routes. On the other hand, the same website would be counted as a business input when it is used by a pizza restaurant to plan delivery routes. Contrary to critics of the U.S. Bureau of Economic Analysis (BEA), the process of including ?free? media in the input-output accounts has little impact on either GDP or total factor productivity (TFP). Between 1998 and 2012, measured nominal GDP growth falls 0.005% per year, real GDP growth rises 0.009% per year and TFP growth rises 0.016% per year. Between 1929 and 1998, measured nominal GDP growth rises 0.002% per year, real GDP growth falls 0.002% per year, and TFP growth rises 0.004% per year. These changes are not nearly enough to reverse the recent slowdown in growth. Our method for accounting for free media is production oriented in the sense that it is a measure of the resource input into the entertainment (or other content) of the medium rather than a measure of the consumer surplus arising from the content. The BEA uses a similar productionoriented approach when measuring GDP. In contrast, other researchers use broader approaches to measure value. Brynjolfsson and Oh (2012) attempt to capture some consumer surplus by measuring the time expended on the Internet. Varian (2009) argues that much of the value of the Internet is in time saving, an additional metric for capturing consumer surplus. The McKinsey Institute (Bughin et al. 2011) attempts to measure the productivity gain from search directly. In particular, this production-oriented accounting has no method to account for instances in which the good or service precedes the revenue that it eventually generates. Over the past two decades, many Silicon Valley firms have followed the disruptive business model described as URL: ubiquity now, revenue later. Some firms have been creating proprietary software or research, which is already captured in the national accounts as investment. Other firms have been creating intangible investments in open source software, customer networks and other organizational capital. Despite their long-run value, none of these intangible assets are currently captured in the national accounts as investment. If we treat these asset categories as capital, then the productivity boom from 1995 to 2000 becomes even stronger and the weak productivity growth of the past decade may be ameliorated somewhat.
AUTHORS: Soloveichik, Rachel; Nakamura, Leonard I.; Samuels, Jon
Does it pay to read your junk mail? evidence of the effect of advertising on home equity credit choices
We examine the effect of direct mail (commonly referred to as junk mail) advertising on individual financial decisions by studying consumer choice of home equity debt contracts. Consistent with the theoretical predictions, we find that financial variables underlying the relative pricing of debt contracts are the leading factors explaining consumers home equity debt choice. Furthermore, we also find that the intended use of debt proceeds significantly impacts consumer choice. However, when we study a subset of consumers who received a direct mail solicitation for a particular debt contract (fixed versus adjustable-rate), we find evidence that the relative pricing variables are less relevant in explaining consumer contract choice, even though they were presented with a full menu of debt contracts. Thus, our results are consistent with the persuasive view of advertising.
AUTHORS: Agarwal, Sumit; Ambrose, Brent W.