The changing architecture of advertising agencies

Sharon Horsky*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

26 Scopus citations

Abstract

In contrast to other marketing activities, advertising is usually outsourced - historically, to an integrated full-service advertising agency that provides both creative and media services. Recently, major changes have occurred, specialized media shops have appeared, and large holding companies with several agencies and a separate media shop have emerged. This paper describes how firms in the current industry structure choose their agents. A theoretical section specifies the firm's decision process in obtaining the creative and media components. Conditions under which one or both could be effectively produced internally are identified. In the prevalent case when these components are outsourced, we evaluate whether they can be more efficiently produced by a bundled full-service agency or by unbundling to separate agents. An empirical section tests the theory implications with cross-sectional data on U.S. firm choices of advertising agents. The bundled full-service agency is still widely used. Firms with large advertising budgets unbundle to take advantage of media discounts obtained by market-making media shops. Internal agencies are used when firms have internal creative abilities, or have low-level requirements in both creative and media. The creative and media agencies within holding companies are found to act independently.

Original languageAmerican English
Pages (from-to)367-383
Number of pages17
JournalMarketing Science
Volume25
Issue number4
DOIs
StatePublished - 2006
Externally publishedYes

Keywords

  • Advertising agencies
  • Double marginalization
  • Media shops
  • Outsourcing
  • Unbundling

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