The Unbundling of Advertising Agency Services: An Economic Analysis

Abstract

We address a puzzle surrounding the shift from bundling to unbundling of U.S. advertising agency services and the slow pace of change over several decades. We model an agency’s decision as a tradeoff between the fixed cost to the advertiser of establishing a relationship with an agency and pecuniary economies of scale from media services provision. Using micro-data from the U.S. Census of Services for 1982-2007, we find agencies are more likely to unbundle with increasing size, diversification and higher media prices, and less likely with increasing age, larger media volume, and an interaction between media prices and volume.

The Internalization of Advertising Services: An Inter-Industry Analysis

“…However, the structure of trade associations that supported the recognition system was essentially dismantled by a 1956 consent decree (Holland 1981), removing the institutional barriers that had long prevented internalizing advertising services and encouraging the gradual abandonment of media commissions in agency compensation and the unbundling of advertising agency services. Thus, an increase in internalization of advertising services in the 1990s implied by this study would be consistent with the evidence of the growth of unbundling reported in Arzaghi et al (2010).…”

“…First, our measure of vertical integration does not distinguish between "full" and "partial" (or "tapered") vertical integration (Perry 1989). With the shift away from billings-based agency compensation and the growth of holding companies (Silk and Berndt 2004), the unbundling of creative and media services has become more widespread (Arzaghi et al 2010), increasing the likelihood of partial integration (Horsky 2006). Second, our reliance on sector dummy variables affords only a crude means of inferring inter-industry differences in transaction costs.…”

“…The decade of the 1990s was a period when the institutional arrangements that served as barriers to internalization had been eroded (Arzaghi et al 2010). Also, this period encompasses the initial growth phase of the internet as an advertising medium, which was interrupted by the 2001 economic downturn.…”

Build It, Buy It, or Both? Rethinking the Sourcing of Advertising Services

“…For reasons discussed in Arzaghi, Berndt, Davis, and Silk (2012), these twin policies gradually faded away, though slowly (Weilbacher, 2003). Cost-based fees eventually replaced media-based commissions as the dominant method of agency compensation with agencies unbundling their services and advertisers splitting their accounts across multiple firms.…”

Build It, Buy It or Both? Rethinking the Sourcing of Advertising Services

“…While the signing of the consent decree is credited with effectively dismantling the administrative structure of the recognition system (Holland, 1981), it had little or no immediate effect on agency compensation or the bundling of agency services. For reasons discussed in Arzaghi, Berndt, Davis, and Silk (2012), these twin policies gradually faded away, though slowly (Weilbacher, 2003). Cost-based fees eventually replaced media-based commissions as the dominant method of agency compensation with agencies unbundling their services and advertisers splitting their accounts across multiple firms.…”