Full text available at: http://dx.doi.org/10.1561/1700000033 Conflict Policy and Advertising Agency{Client Relations: The Problem of Competing Clients Sharing a Common Agency Full text available at: http://dx.doi.org/10.1561/1700000033 Conflict Policy and Advertising Agency{Client Relations: The Problem of Competing Clients Sharing a Common Agency Alvin J. Silk Harvard Business School Harvard University USA [email protected] Boston { Delft Full text available at: http://dx.doi.org/10.1561/1700000033 Foundations and Trends R in Marketing Published, sold and distributed by: now Publishers Inc. PO Box 1024 Hanover, MA 02339 USA Tel. +1-781-985-4510 www.nowpublishers.com [email protected] Outside North America: now Publishers Inc. PO Box 179 2600 AD Delft The Netherlands Tel. +31-6-51115274 The preferred citation for this publication is A. J. Silk, Conflict Policy and Advertis- ing Agency{Client Relations: The Problem of Competing Clients Sharing a Common Agency, Foundations and Trends R in Marketing, vol 6, no 2, pp 63{149, 2011 ISBN: 978-1-60198-604-7 c 2012 A. J. Silk All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, mechanical, photocopying, recording or otherwise, without prior written permission of the publishers. Photocopying. In the USA: This journal is registered at the Copyright Clearance Cen- ter, Inc., 222 Rosewood Drive, Danvers, MA 01923. Authorization to photocopy items for internal or personal use, or the internal or personal use of specific clients, is granted by now Publishers Inc for users registered with the Copyright Clearance Center (CCC). The `services' for users can be found on the internet at: www.copyright.com For those organizations that have been granted a photocopy license, a separate system of payment has been arranged. Authorization does not extend to other kinds of copy- ing, such as that for general distribution, for advertising or promotional purposes, for creating new collective works, or for resale. In the rest of the world: Permission to pho- tocopy must be obtained from the copyright owner. Please apply to now Publishers Inc., PO Box 1024, Hanover, MA 02339, USA; Tel. +1-781-871-0245; www.nowpublishers.com; [email protected] now Publishers Inc. has an exclusive license to publish this material worldwide. Permission to use this content must be obtained from the copyright license holder. Please apply to now Publishers, PO Box 179, 2600 AD Delft, The Netherlands, www.nowpublishers.com; e-mail: [email protected] Full text available at: http://dx.doi.org/10.1561/1700000033 Foundations and Trends R in Marketing Volume 6 Issue 2, 2011 Editorial Board Editor-in-Chief: Jehoshua Eliashberg University of Pennsylvania Co-Editors Teck H. Ho University of California Berkeley Mary Frances Luce Duke University Editors Joseph W. Alba, University of Florida David Bell, University of Pennsylvania Gerrit van Bruggen, Erasmus University Pradeep Chintagunta, University of Chicago Dawn Iacobucci, University of Pennsylvania Brian Sternthal, Northwestern University J. Miguel Villas-Boas, University of California, Berkeley Marcel Zeelenberg, Tilburg University Full text available at: http://dx.doi.org/10.1561/1700000033 Editorial Scope Foundations and Trends R in Marketing will publish survey and tutorial articles in the following topics: • B2B Marketing • Marketing Decisions Models • Bayesian Models • Market Forecasting • Behavioral Decision Making • Marketing Information Systems • Branding and Brand Equity • Market Response Models • Channel Management • Market Segmentation • Choice Modeling • Market Share Analysis • Comparative Market Structure • Multi-channel Marketing • Competitive Marketing Strategy • New Product Diffusion • Conjoint Analysis • Pricing Models • Customer Equity • Product Development • Customer Relationship • Product Innovation Management • Sales Forecasting • Game Theoretic Models • Sales Force Management • Group Choice and Negotiation • Sales Promotion • Discrete Choice Models • Services Marketing • Individual Decision Making • Stochastic Model Information for Librarians Foundations and Trends R in Marketing, 2011, Volume 6, 4 issues. ISSN paper version 1555-0753. ISSN online version 1555-0761. Also available as a com- bined paper and online subscription. Full text available at: http://dx.doi.org/10.1561/1700000033 Foundations and Trends R in Marketing Vol. 6, No. 2 (2011) 63{149 c 2012 A. J. Silk DOI: 10.1561/1700000033 Conflict Policy and Advertising Agency{Client Relations: The Problem of Competing Clients Sharing a Common Agency∗ Alvin J. Silk Lincoln Filene Professor Emeritus, Graduate School of Business Administration, Harvard University, Soldiers Field, Boston, MA 02163, USA, [email protected] Abstract What restrictions should be placed on advertising agencies with respect to serving accounts or clients who are competitors of one another in order to avoid conflicts of interest? In recent decades, the advertis- ing and marketing services industry has undergone a number of struc- tural changes that forced an ongoing re-examination and modification * I am indebted to Makoto Abe, Tim Ambler, Marc Brownstein, Rance Crain, Pat Kauf- mann, Paul Michel, Brian Moeran, Brian Wieser, and Tom Finneran and members of the American Association of Advertising Agencies' \New Business" Committee for help- ful comments on an earlier draft of this monograph. Thanks are due to Peter Danaher, Don Dillon, Herb Minkel, Jr., Rupal Parekh, John Roberts, and Jiro Yoshino for dis- cussions of conflict policies. The assistance of Earl Campbell, John Deighton, and Susan Keane and the support of the Division of Research, Harvard Business School are gratefully acknowledged. Suggestions offered by Josh Eliasberg, Zac Rolnik, Miguel Villas-Boas, and an anonymous reviewer were much appreciated. My greatest debt is to Keri D. Jones; without her help and patience, this project could not have been completed. The usual disclaimer applies. Full text available at: http://dx.doi.org/10.1561/1700000033 of traditional norms and policies emphasizing exclusivity in agency{ client relationships. A typology of conflicts that have arisen in the U.S. shows the variety and complexity of contemporary conflicts. Cases of conflicts reported in the trade literature are used to illustrate policy issues as well as the spillover effects and resolution of disputes. To cope with these developments, two significant changes in conflict policies evident in current U.S. practice are identified. First, safeguards to preserve proprietary information that function as organizational, location, and personnel mobility barriers among quasi-autonomous units within a mega agency or holding company have become an essen- tial component of conflict policies. Subject to the protection against security breaches afforded by safeguards, rival clients may be served by separate organizational units that are under common control and/or ownership. Second, a family of hybrid conflict polices has evolved that feature elements of the split account system long practiced in Japan, augmented by safeguards that serve as partial substitutes for the umbrella prohibition on serving rivals imposed by exclusivity. By relying on safeguards and splitting account assignments in a variety of ways among different organizational units within a given mega-agency or holding company that may also serve rivals (or across different mega agencies or holding companies), clients exert a measure of control over the access of those agencies to confidential information while also offer- ing them incentives to avoid conflicts of interest. Findings from the existing body of conceptual and empirical research bearing on the sources and consequences of conflicts are reviewed and directions for further research are discussed. Full text available at: http://dx.doi.org/10.1561/1700000033 Contents 1 Introduction 1 2 Conflicts of Interest in Professional Services 5 2.1 Conceptual Framework 6 2.2 Safeguard Policies 8 3 Historical Background 11 3.1 Evolution of the Norm of Exclusivity in the U.S. 12 3.2 The Japanese \Split Account System": An Alternative to Exclusivity 14 3.3 Industry Growth, Structural Change and the Rise of Holding Companies 19 4 Complex Conflicts 23 4.1 Divergent Perspectives of Agencies and Clients 23 4.2 Taxonomy of Agency{Client Conflicts 25 5 Designing Policies for Complex Conflicts 31 5.1 Policy Guidelines 32 5.2 Types of Safeguards 34 5.3 Hybrid Conflict Policies: Adaptive Split Assignments with Safeguards 35 5.4 Resolving Complex Agency{Client Conflicts 40 ix Full text available at: http://dx.doi.org/10.1561/1700000033 6 Safeguards and Contracts 45 6.1 Threats to Confidentiality 46 6.2 Internal Agency Organizational and Locational Barriers 48 6.3 Mobility Barriers 50 7 Economic Analysis of Agency-Client Conflicts of Interest 57 7.1 Event Studies of the Effect of Changing Agencies 57 7.2 Concentration Levels and the Size Structure of the U.S. Advertising and Marketing Services Industry 62 7.3 Exclusivity as an Institutional Mobility Barrier: Diversification by Agencies and Holding Companies 64 7.4 Oligopolistic Rivalry and Advertiser's Choice of Exclusive vs. Shared Agency 68 8 Directions for Further Research 73 9 Conclusion 77 References 81 Full text available at: http://dx.doi.org/10.1561/1700000033 1 Introduction “Conflicts in advertising are taboos as religious as any you would find in the Middle Ages." Mary Wells Lawrence (2002, p. 231). It has long been recognized that advertising agencies in the U.S. and Europe