A Game Theory Model of Celebrity Endorsements

Authors:
Mark N. Hertzendorf
Working Paper:
211

Since Milgrom and Roberts (1986) game theorists studying advertising have generally assumed that aggregate advertising expenditures are perfectly observed by consumers. In the real world, however, consumers see only a small fraction of the commercials aired by a given firm and typically do not view the firm's total advertising expenditure. This gives the firm an incentive to make sure that each commercial has as much impact as possible. The impact of a commercial may be enhanced through extravagant production costs, or by purchasing a celebrity endorsement.  Using a signalling game this paper shows how a monopolist may attempt to balance the cost of production against the cost of air time to send a credible signal to consumers at the minimum possible cost. Several examples illustrate the extent to which extravagant production costs (or expensive celebrity endorsements) can substitute for additional spending on air time. Paradoxically, although it is the existence of signal loss (i.e. consumers viewing fewer commercials than were actually purchased) that makes a multifaceted advertising signal attractive, greater signal loss does not necessarily lead to greater production or endorsement expenditures. Rather as signal loss increases, the monopolist has a tendency to substitute expenditures on air time for expenditures on production or celebrity endorsements.