lydia pinkham sales & advertising dataschwert.ssb.rochester.edu/a425/a425_pinkham.pdf · 28,...

Pinkham Sales & Advertising Data APS 425 - Advanced Managerial Data Analysis

(c) Prof. G. William Schwert, 2002-2015 1

APS 425 Fall 2015

Lydia Pinkham

Sales & Advertising Datahttp://schwert.ssb.rochester.edu/a425/a425_pinkham.wf1

Sales & Advertising Data

• Corporations frequently worry about the efficacy oftheir advertising expenditures. This data file containsannual sales revenue (SALES) and advertisingexpenditures (ADVERT) for the Lydia PinkhamCompany from 1907 through 1960, expressed inthousands of dollars per year ($000).

• Their sole product was an alcohol-based elixir that wassupposed to cure vaguely defined “women’s ailments”(before the FDA and FTC came along and limited thescope of their claims).



Lydia Pinkham's Original FormulaSource: Wikipedia

• Pleurisy root is diaphoretic, anti-spasmodic, carminative, and anti-inflammatory.

• Life root is a traditional uterine tonic, diuretic, anti-inflammatory, and emmenagogueused for amenorrhea or dysmenorrhea.

• Fenugreek is vulnerary, anti-inflammatory, anti-spasmodic, tonic, emmenagogue, galactogogue, and hypotensive.

• Unicorn Root was used by several Native American tribes for dysmenorrhea, uterine prolapse, pelvic congestion and to improve ovarian function.

• Black cohosh is an emmenagogue, anti-spasmodic, alterative, nervine, and hypotensive and is used traditionally for menopausal symptoms.

• The formula also contains drinking alcohol, ethanol

Prohibition in the USSource: Wikipedia

• 18th Amendment to the US Constitution, prohibiting the sale of alcoholic beverages was ratified in early 1919 and made effective in 1920

• Wartime Prohibition Act was effective in June 1919

• Volstead Act, the popular name for the National Prohibition Act, passed on October 28, 1919, which established the legal definition of intoxicating liquor

• March 22, 1933, the Cullen-Harrison Act allowed the manufacture and sale of certain kinds of alcoholic beverages

• December 5, 1933, the ratification of the 21st Amendment repealed the 18th Amendment, ending Prohibition

• During this time, the Lydia Pinkham product (which was 40% alcohol) remained legal for sale



Is Advertising a Capital Good?

• These data were used in early research papers bymarketing academics to study long-term effects ofadvertising.

• The basic question is whether the money you spend onadvertising today helps build brand capital thatincreases sales in future years.

• Of course, marketing managers are likely to thinkpositively about results that show the benefits fromadvertising extend past the current sales year.

Or, Is Advertising Wasteful?

• A skeptical view that is sometimes expressed by non-marketing managers is that the marketing departmentwill spend any money it can get its hands on.

• Since it is hard to measure the effectiveness ofadvertising, firms spend more when it seems “cheap”because they have a lot of cash coming in fromproduct sales, but cut back on advertising when timesare tough and sales are down.

• From this perspective, high sales revenue is the causeof high advertising expenditures, not vice versa.



Cross Correlations of Sales and Advertising

•It looks like the correlations are stronger between advertising and past sales, than vice versa

Are Sales Affected by Past Advertising?

• It looks like past advertising has little effect on future SALES, but DW is small



Residual Autocorrelations

• Try AR(1) model to fix residual autocorrelation

Sales & Past Advertising,AR(1) Model

•Much better model statistically

•$1000 of current advertising is associated with $673 of additional sales this period, $202 of additional sales next period, and $106 of additional sales two periods in the future

•Looks it only produces $981 in additional revenue, even ignoring the time value of money



Actual & Residual Plot

Sales & Past Advertising,AR(1) Model with Prohibition

•It looks like Sales were about $147,000 higher during the prohibition years

•P-value = .11



Sales Related to Past & Future Advertising

•It looks like higher current sales are associated with higher future advertising

•But, DW is low

AR(1)?

Residual Autocorrelations



•Now that the residual autocorrelation is fixed, it looks like the coefficients of past and future advertising are almost symmetric

•Not at all clear that advertising causes higher sales

Sales Related to Past & Future Advertising, AR(1)

Actual & Residual Plot



Can Advertising Help Predict Future Sales (Given Past Sales)?

Coefficients of lagged advertising are negative, and probably not significant

Try a Wald test

Can Advertising Help Predict Future Sales (Given Past Sales)?

Wald test shows that lagged advertising is significant (and negative!)



Vector Autoregression of Sales and Advertising

•Note that this is just a quick way to run two regressions at the same time

•You’ve already seen the sales regression


•This is exactly the same regression we saw three slides ago



Granger “Causality Tests” for Sales and Advertising

Note that the “Granger Causality Test” is just the Wald test for whether lagged Advertising helps predict future sales, given past sales (except that there is no adjustment for heteroskedasticity)

Vector Autoregression of Sales and Advertising with Prohibition

•Include Prohibition as another exogenous variable




•Looks like advertising increased more significantly than sales during prohibition



Links

Eviews worksheethttp://schwert.ssb.rochester.edu/a425/a425_pinkham.wf1

APS 425 Home Pagehttp://schwert.ssb.rochester.edu/a425/a425main.htm

lydia pinkham sales & advertising dataschwert.ssb.rochester.edu/a425/a425_pinkham.pdf · 28,...

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