It’s a puzzle about something that you encounter all the time. Every day, we are each exposed to hundreds, even thousands of advertisements — a number that’s grown exponentially thanks to the internet. In the U.S., more than $250 billion a year is spent on advertising; globally, the figure is more than half a trillion dollars. So, it would seem there’s a basic question worth asking: does all that advertising actually work? [...]
Let’s assume the percent change in advertising is 100 percent; in other words, you double your ad spending. An ad elasticity of .15 or .2 indicates that sales would increase by 15 or 20 percent. Which is a pretty substantial increase. Which would suggest that advertising spending is quite effective. At least that’s what the existing benchmark said. But when Tuchman, Shapiro, and Hitsch calculated the ad elasticity in their own research, they found a much smaller number: .01.
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