Efficiency and productivity analysis of advertising in U.S. automobile industry

This paper addresses advertising efficiency and advertising productivity by applying Data Envelopment Analysis (DEA) in the context of US automobile industry. We first analyze advertising efficiency of automobile firms to assess whether firms have spent an optimal amount of expenditures on advertising overall and whether firms have spent too much or too little advertising expenditures on one medium versus another. From the estimates we obtain, none of the firms in the sample are allocating advertising expenditure optimally across different media. We then analyze advertising productivity through the Malmquist productivity index. We also investigate technical change and efficiency change components of the index. The empirical result suggests that on average, advertising productivity declines for firms in our sample over the 1999-2005 period. Most of the deterioration in productivity over the period is attributed to technical change.

Numerous productivity studies have focused their attention on the production side of the firm, yet advertising may be just as important for increasing sales and promoting the overall success of the firm. The U.S. automobile industry is a great example: firms adopt advertising as a key strategy to raise sales and market share. In 2012, the U.S. automobile industry spent over 20 billion dollars in advertising. GM was ranked number 2 in the country in advertising expenditure (3,067 million dollars), Ford was ranked number 6 in advertising expenditure (2,277 million dollars), and Toyota was ranked number 10 in advertising expenditure (2,008 million dollars). Other automobile firms spent a large amount on advertising as well; for example, Daimler Chrysler, Nissan and Honda each spent over 1,000 million dollars in advertising. Given the enormous amounts of advertising expenditures, the question may be raised regarding the possible inefficiency of advertising. This paper aims to assess advertising efficiency as well as advertising productivity in the U.S. automobile industry employing Data Envelopment Analysis (DEA) technique.