Issues in Advertising: The Economics of Persuasion

By David G. Tuerck | Go to book overview
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ADVERTISING AND OLIGOPOLY:
CORRELATIONS IN SEARCH OF
UNDERSTANDING
John A. Henning and H. Michael MannNot all economists interested in the competitive process are persuaded that advertising diminishes the strength of competitive forces. However, we are among those who believe that this proposition is confirmed by certain empirical regularities observed by various investigators. What is not clear, however, is why this seems to be the case, and it is this ignorance to which our paper is addressed.We begin with a brief reference to the findings that lay the basis for the claim that advertising impedes competition, including our argument that economic theory provides plausible alternative mechanisms to explain the observed empirical results. We then offer some findings that suggest how the world may be working. We emphasize "may," for our efforts to date are necessarily tentative, pending further research. The working hypothesis suggested by our analysis is that intense advertising apparently follows from high levels of new product introduction by the leading established firms in an industry. It is this behavior, then, that requires further analysis if understanding is to be enhanced.Advertising and Oligopoly. The evidence to date permits the following conclusions:
Advertising intensity--the ratio of advertising-to-sales revenue--is positively associated with market concentration. Most studies find the positive relationship statistically significant, unlikely to be a chance occurrence. We are aware of three studies, though, that maintain that the association is positive and significant only up to a particular level of concentration. After that level the relationship becomes negative.1
____________________
1
The number of studies is quite large. Surveys of them are contained in H. M. Mann , "Advertising, Concentration, and Profitability: The State of Knowledge and Directions for Public Policy," in Industrial Concentration: The New Learning, H. J. Goldschmid, H. M. Mann, and J. P. Weston, eds. ( Boston: Little, Brown & Co., 1974); and James M. Ferguson, Advertising and Competition: Theory, Measurement, Fact ( Cambridge, Mass.: Ballinger, 1975). A recent, unpublished paper is: Stanley I. Ornstein, "The Advertising-Concentration Controversy," 1975.

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