Even the Rich Can Make Themselves Poor: A Critical Examination of IV Methods in Marketing Applications

Marketing is a field that is rich in data. Our data is of high quality, often at a highly disaggregate level, and there is considerable variation in the key variables for which estimates of effects on outcomes such as sales and profits are desired. The recognition that, in some general sense, marketing variables are set by firms on the basis of information not always observable by the researcher has led to concerns regarding endogeneity and widespread pressure to implement instrumental variables methods in marketing problems. The instruments used in our empirical literature are rarely valid and the IV methods used can have poor sampling properties, including substantial finite sample bias and large sampling errors. Given the problems with IV methods, a convincing argument must be made that there is a first order endogeneity problem and that we have strong and valid instruments before these methods should be used. If strong and valid instruments are not available, then researchers need to look toward supplementing the information available to them. For example, if there are concerns about unobservable advertising or promotional variables, then the researcher is much better off measuring these variables rather than using instruments (such as lagged marketing variables) that are clearly invalid. Ultimately, only randomized variation in marketing variables (with proper implementation and large samples) can be argued to be a valid instrument without further assumptions.