Issues in Advertising: The Economics of Persuasion

By David G. Tuerck | Go to book overview

link concentration to advertising independent of monopoly power explanations, such as the efficient firm hypothesis.

Summary. Can something be learned from these various regression estimates despite the econometric difficulties and inconsistencies across periods? A few things seem clear. First, initial year advertising intensity is unrelated to subsequent changes in concentration. There is no basis to predict that industries today with high advertising intensity will experience increases in concentration in future years.

Second, increases in advertising expenditures relative to sales are generally positively related to increases in concentration. However, this is probably not a consequence of advertising-induced barriers to entry since decreases in advertising-to-sales ratios are not related to decreases in concentration.

Third, the advertising variables explain very little of the variation in concentration changes. Most of the explained variation stems from the measures of market growth, changes in average firm size, and the tendency of concentration ratios to change toward the mean concentration of all industries over time. Even these variables explain no more than 30 percent of the variation.

While barriers-to-entry hypotheses in general were not supported, the question remains unresolved whether the association between increasing advertising and concentration is due to advertising-induced changes in optimal scale. The lack of association between increases in total advertising or advertising per firm and concentration appears as evidence against this possibility for 1947-1963 and 1947-1967. However, the existence of an association appears to favor this hypothesis for 1963-1967. Unfortunately, the results are consistent with a number of other hypotheses as well.


Conclusions

Much of the controversy over concentration and advertising intensity has focused on data deficiencies and measurement error. This paper attempted to reduce these problems by matching a comprehensive measure of advertising expenditures with concentration ratios at the four-digit SIC level. This permitted tests between advertising and concentration with data that are less subject to sample bias, aggregation bias, and measurement error than data used in earlier studies. The results of these tests show the following:

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Issues in Advertising: The Economics of Persuasion
Table of contents

Table of contents

  • Title Page iii
  • Major Contributors v
  • Contents ix
  • Introduction 1
  • Acknowledgments 11
  • Part One Issues in Regulation 13
  • Advertising and Legal Theory 15
  • Advertising Regulation and the Consumer Movement 27
  • Commentaries 45
  • Part Two Advertising and the Firm 69
  • Towards a Theory of the Economics of Advertising 71
  • Introduction 71
  • Optimal Advertising: An Intra-Industry Approach 91
  • Conclusion 111
  • Technical Appendix 112
  • Commentaries 115
  • Part Three Advertising as Information 131
  • Advertising as Information Once More 133
  • Appendix A: Derivation of the Relationship Between a and P 156
  • Appendix B: Data Sources 158
  • Advertising, Information, and Product Differentiation 184
  • Commentaries 193
  • Four Part Advertising, Concentration, and Profits 215
  • Advertising Intensity and Industrial Concentration- an Empirical Inquiry, 1947-1967 217
  • Conclusions 249
  • Advertising and Oligopoly: Correlations in Search of Understanding 253
  • Appendix A 262
  • Appendix B 263
  • Commentaries 267
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