Valuing advertising investment with modular strategies under copula-based dependence

In this work, we estimate the value of a contract between a company seeking to advertise its business on two or more television channels and a television network. Specifically, we present a method for evaluating a real option that allows advertisements to be broadcast on multiple channels while considering the dependence structure of the dynamics of viewers among the different channels by a copula function. We model the dynamics of viewers through a Markov reward process, and we use a specific function to transform it into earnings. Then, we compute the n-th-order moment of the total discounted payoffs to find the probability distribution of the payoff function and price the option. Finally, we propose an empirical application using real television audience data, introducing the hypothesis of modular strategies. Specifically, we assume that the advertisements are broadcast at selected times depending on the channel. For simplicity of study, we consider the case of two channels, but the proposed methodology can be immediately extended to more channels.