A Model of Advertising Format Competition : On the Use of Celebrities in Ads

It is estimated that companies in the U.S. spent $800 million in 1998 to quot;acquire talent -- entertainers, athletes and other high profile personalities -- to spotlight in advertising, promotion and PR campaignsquot; (IEG Endorsement Insider). Such ads appear in a variety of media. How do we understand the firm's decision to use (or not) a celebrity and to do so in some given set of media? To answer this question, we develop a coordination model of advertising in which firms choose both advertising levels and advertising format -- ads with or without celebrity endorsements and either more or less broadly targeted. We show that equilibrium formats are either ones that reach large audiences at low cost or that coordinate well. The former provides a cost-based explanation for celebrity endorsements consistent with experiments showing that celebrities enhance product recall. The latter is consistent with evidence that celebrity endorsements enhance consumer perception of product value. For this case, we show that celebrity endorsements arise for products that i) have large customer bases or ii) provide large coordination returns to consumers. We also show that a broadly based advertising campaign featuring a celebrity can be valuable when coordination across diverse sets of customers is important