Ads as Cues" with Pedro Bordalo, Giovanni Burro, Gad Nacamulli and Andrei Shleifer

Abstract:

We present and test a model in which, as in Bordalo et al. (2020), a consumer is more likely to demand a good if she recalls the pleasure it gave her in the past. Following memory research, recall is more likely for goods that are frequent and similar to cues, subject to interference from other experiences. The model delivers brand habits and ads that affect demand by working as cues. It predicts that ads: i) are more effective for more habitual consumers and ii) exhibit spillovers within and across product categories, driven by similarity. We find robust support for these predictions using data from NielsenIQ and Nielsen, which proxies for households’ past consumption, exposure to the ads of different brands, and similarity between ads. Memory offers new insights on how advertising affects market competition and consumer welfare.