A structural estimation of the relationship between advertising expenditure and car sales

This paper estimates the effect of total advertising on U.S. automobile sales, as well as the specific effects of advertising through different media on such sales. Specifically, I apply the GMM technique developed by Berry, Levinsohn, and Pakes (“BLP” 1995) to estimate the effects of advertising in the U.S. automobile market. In BLP, price is the only endogenous variable. I extend the BLP model by including advertising as an additional endogenous variable for the purpose of estimation. Using automobile characteristic and pricing data from Ward's Automotive News Yearbook and advertising data from Competitive Media Reporting, I estimate the model. The results suggest that advertising across different media results in an increase of market share for an automobile model. However, when comparing network TV to cable TV, the results show clearly that network TV will increase sales, while the effect of cable TV advertising is unclear.