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The Effect of Provision Points on Generic Advertising Funding

Sandeep Krishnamurthy
Marketing Letters
Vol. 12, No. 4 (Nov., 2001), pp. 315-325
Published by: Springer
Stable URL: http://www.jstor.org/stable/40216611
Page Count: 11
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The Effect of Provision Points on Generic Advertising Funding
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Abstract

Generic advertising promotes the general qualities of a product category and, therefore, benefits all firms in the category. Recent examples of such campaigns organized through voluntary contributions by firms are found in the Life Insurance, ("It's 1998. You're Dead. What Do You Do Now? ") and Steel industries ("The New Steel. Feel Strength."). Free-riding is commonly observed in such campaigns when they use the Simple Voluntary Contribution Mechanism (VCM)- here the budget is obtained by simply adding up the voluntary contributions of firms. We propose a new mechanism called the Provision Point VCM that can help alleviate this free-riding problem. Here, a target budget called the provision point is announced with the condition that the campaign will be mounted if and only if the contributions equal or exceed this point. First, analytically we briefly describe the results for the Simple VCM. Here, free-riding will always result in equilibrium and the advertising budget never maximizes industry welfare. Then, we show that if the provision point is set equal to the Pareto Optimum, the industry welfare maximizing advertising budget is always a feasible equilibrium outcome and is a unique outcome in some cases. In fact, we show that no other Provision Point VCM can lead to welfare maximization. Then, we present results from experiments using MBA students that test these findings. Consistent with our analytical results, we show that when the provision point is set equal to the Pareto Optimum, it outperforms the Simple VCM in terms of overall contributions and free-riding behavior.

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