The Impact of Scale and Media Mix on Advertising Agency Costs

Nonlinear cost functions are employed to study the effects of scale and client media allocations on advertising agency costs.Over 200 UoS agencies in 1977 were apparently large enough to exhaust essentially all economies of scale, though very small agencies may have had substantial scale-related cost disadvantages.Agencies' costs seem to be sensitive to the mix of media in which their clients advertise.On average, larger agencies' clients advertise in media that are apparently more profitable for the agencies.Implications for a number of issues in marketing and industrial organization are briefly explored.