Dynamic Marketing Budgeting for Platform Firms: Theory, Evidence, and Application

Abstract

Few studies address the marketing budgeting problems of platform firms operating in two-sided markets with cross-market network effects, such that demand from one customer group in the platform influences the demand from the other customer group. Yet such firms (e.g., newspapers whose customers are both subscribers and advertisers) are prevalent in the marketplace and invest significantly in marketing. To enable such firms to make effective marketing decisions, the authors delineate the desired features of a platform firm's marketing response model, specify a new response model, and validate it using market data from a local newspaper. The results show that the firm faces reinforcing cross-market effects, its demand from both groups depends on marketing investments, and the model exhibits good forecasting capability. The authors use the estimated response model to determine optimal marketing investments over a finite planning horizon and find that the firm should significantly increase its newsroom and sales force investments. With this model-based recommendation, the firm's management increased its newsroom budget by 18%. Further normative analysis sheds light on how cross-market and carryover effects alter classical one-sided marketing budgeting rules.