Abstract
This paper examines the structural relation between persuasive advertising intensity and market concentration. The interaction of advertising costs with the consumer’s willingness to pay shapes the way markets respond to changes in sunk cost structures. This adjustment may involve firm entry and exit or modifications in advertising levels. It is shown that a non-monotonic association between advertising intensity and concentration may emerge even in the absence of collusion, requiring as a necessary condition that the ratio of operational profits and advertising cost elasticities with respect to a measure of perceived quality be decreasing. This result is robust to changes in both exogenous and endogenous sunk cost parameters. A simple tool is also proposed to empirically assess the behavior of the elasticities ratio. Finally, the model describes how intertemporal general equilibrium mechanisms may skew or even reverse the advertising-concentration relation through scale effects.
Similar content being viewed by others
Notes
This holds even after taking into account the endogeneity of consumption expenditures \((E)\) as the next section will allow us to confirm.
It must be noted that, analytically, the conditions presented in Assumption 1 do not necessarily lead to a decreasing ratio of elasticities.
References
Aghion P, Bloom N, Blundell R, Griffith R, Howitt P (2005) Competition and innovation: an inverted-U relationship. Q J Econ 120(2):701–728
Ashley R, Granger C, Schmalensee R (1980) Advertising and aggregate consumption: an analysis of causality. Econometrica 48(5):1149–1167
Bagwell K (2007) The economic analysis of advertising. In: Armstrong M, Porter R (eds) Handbook of industrial organization, vol 3. North-Holland, Amsterdam
Bagwell K, Lee G (2010) Advertising collusion in retail markets. BE J Econ Anal Policy 10:Article 71
Becker G, Murphy K (1993) A simple theory of advertising as a good or bad. Q J Econ 108(4):941–964
Bloch F, Manceau D (1999) Persuasive advertising in hotelling’s model of product differentiation. Int J Ind Organ 17:557–574
Bolle F (2011) Over- and under-investment according to different benchmarks. J Econ 104(3):219–238
Boyd R, Seldon B (1990) The fleeting effect of advertising: empirical evidence from a case study. Econ Lett 34(4):375–379
Buxton A, Davies S, Lyons B (1984) Concentration and advertising in consumer and producer markets. J Ind Econ 32(4):451–464
Comanor W, Wilson T (1979) The effect of advertising on competition: a survey. J Econ Lit 17(2):453–476
Dixit A, Norman V (1978) Advertising and welfare. Bell J Econ 9(1):1–17
Eckard W (1991) Competition and the cigarette TV advertising ban. Econ Inq 29(1):119–133
Esposito F, Esposito L, Hogan W (1990) Interindustry differences in advertising in U.S. manufacturing: 1963–1977. Rev Ind Organ 5(1):53–80
García-Gallego A, Georgantzís N (2009) Market effects of changes in consumers’ social responsibility. J Econ Manag Strategy 18(1):235–262
Gary-Bobo R, Michel P (1991) Informative advertising and competition: a noncooperative approach. Int Econ Rev 32(2):321–339
Gisser M (1991) Advertising, concentration and profitability in manufacturing. Econ Inq 29(1):148–165
Greer D (1971) Advertising and market concentration. South Econ J 38(1):19–32
Kaldor N, Silverman R (1948) A statistical analysis of advertising expenditure and the revenue of the press. University Press, Cambridge
Leahy A (1997) Advertising and concentration: a survey of the empirical evidence. Q J Bus Econ 36(1):35–50
Lee CY (2002) Advertising, its determinants, and market structure. Rev Ind Organ 21(1):89–101
Lee CY (2005) A new perspective on industry R &D and market structure. J Ind Econ 53(1):101–122
Leone R (1995) Generalizing what is known about temporal aggregation and advertising carryover. Mark Sci 14(3):G141–G150
Levin R, Cohen W, Mowery D (1985) R &D appropriability, opportunity, and market structure: new evidence on some Schumpeterian hypothesis. Am Econ Rev 75(2):20–24
Lynk W (1981) Information, advertising, and the structure of the market. J Bus 54(2):271–303
Sacco D, Schmutzler A (2011) Is there a U-shaped relation between competition and investment? Int J Ind Organ 29(1):65–73
Scherer FM (1980) Industrial structure and economic performance. Rand McNally College Publishing Co., Chicago
Seldon B, Doroodian K (1989) A simultaneous model of cigarette advertising: effects on demand and industry response to public policy. Rev Econ Stat 71(4):673–677
Stigler G, Becker G (1977) De gustibus non est disputandum. Am Econ Rev 67(2):76–90
Sutton J (1989) Endogenous sunk costs and the structure of advertising intensive industries. Eur Econ Rev 33(2–3):335–344
Sutton J (1991) Sunk costs and market structure. The MIT Press, Cambridge
Sutton J (1998) Technology and market structure: theory and history. The MIT Press, Cambridge
Symeonidis G (2003) In which industries is collusion more likely? Evidence from the UK. J Ind Econ 51(1):45–74
Thomas L (1989) Advertising in consumer goods industries: durability, economies of scale, and heterogeneity. J Law Econ 32(1):163–193
Tingvall P, Poldahl A (2006) Is there really an inverted U-shaped relation between competition and R &D? Econ Innov New Technol 15(2):101–118
Uri N (1987) A re-examination of the advertising and industrial concentration relationship. Appl Econ 19(4):427–435
Vives X (2008) Innovation and competitive pressure. J Ind Econ 56(3):419–469
von der Fehr NH, Stevik K (1998) Persuasive advertising and product differentiation. South Econ J 65(1):113–126
von Ungern-Sternberg T (1988) Monopolistic competition and general purpose products. Rev Econ Stud 55(2):231–246
Willis M, Rogers R (1998) Market share dispersion among leading firms as a determinant of advertising intensity. Rev Ind Organ 13(5):495–508
Acknowledgments
The author would like to thank two anonymous referees for their valuable and helpful comments. Any remaining errors are the responsibility of the author.
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
1.1 Existence and uniqueness of advertising solution
Equation 20 can be rearranged as
Denoting the right hand side of this Eq. 37 as \(\chi \),
Given that \(z\in [0,\infty )\), \(\theta (z)\in [0,1]\) and \(\theta ^{\prime }(z)<0\), then \(\theta (0)=1\) and \(\theta (\infty )=0\). Under the sufficient conditions \(\theta ^{\prime \prime }(z)>0\) and \(\varphi ^{\prime \prime }(z)\ge 0\), added to assumptions \(\varphi ^{\prime }(z)>0\) and \(\theta ^{\prime }(z)<0\), it follows that \(\frac{d\chi }{dz}>0,\forall z>0\).
Next, recall that \(\varphi (0)=0\). Hence, \(\chi \vert _{z=0}=0\). Given that \(\frac{d\chi }{dz}>0,\forall z>0\), it follows that \(\chi >0,\forall z>0\). Finally, the fact that \(\theta (z)\) converges monotonically and asymptotically to a finite value as \(z\rightarrow \infty \) implies that \(\lim _{z\rightarrow \infty } \theta ^{\prime }(z)=0^{-}\). Hence, \(\chi \vert _{z\rightarrow \infty }=\infty \). In conclusion, \(\chi \) ranges monotonically from \(0\) to \(\infty \), ensuring that for any pair \((F_{Y},\beta )\) of cost parameters there is a unique solution for \(z\).
1.2 Proof of Proposition 1
As shown in the previous proof, \(\chi \) is increasing in \(z\). Hence, as \(F_{Y}\) increases in the left hand side of Eq. 37, the same must happen with \(z\) on the right hand side. In other words, \(\frac{\partial z}{\partial F_{Y}}>0\).
Regarding the relation between \(F_{Y}\) and \(N\), Eq. 29 yields
where
and
Given that \(\frac{\partial z}{\partial F_{Y}}>0\), \(\theta (z) \in [0,1]\), \(\theta ^{\prime }(z)<0\), \(\varphi ^{\prime }(z)>0\), \(\theta ^{\prime \prime }(z)>0\) and \(\varphi ^{\prime \prime }(z)\ge 0\), it follows that \(\Lambda _{1}<0\), \(\Lambda _{2}>0\) and \(\frac{\partial N}{\partial F_{Y} }<0,\forall F_{Y}>0\).
1.3 Proof of Proposition 2
Given the behavior of \(\chi \), as \(\beta \) increases in the left hand side of Eq. 37, \(z\) must decrease on the right hand side. In other words, \(\frac{\partial z}{\partial \beta }<0\).
Regarding the relation between \(\beta \) and \(N\), Eq. 29 may be combined with 20 to present the equilibrium number of firms as
From here,
where
and
Given that \(\frac{\partial z}{\partial \beta }<0\) and \(\theta ^{\prime }(z)<0\), \(\Gamma _{2}<0,\forall \beta >0\). Accordingly, \(\frac{\partial [\beta \varphi (z)] }{\partial \beta }>0\) is a sufficient condition for \(\frac{\partial N}{\partial \beta }<0\). Expanding on \(\frac{\partial [\beta \varphi (z)]}{\partial \beta }\) and using again Eq. 20, further manipulation yields
where
and
It is straightforward to show that under partial equilibrium, setting \(\alpha =0\), it is always the case that \(\frac{\partial N}{\partial \beta }<0\).
Finally, notice that the equilibrium condition 20 may be rearranged as
Hence, the sufficient condition \(\frac{\partial [ \beta \varphi (z)]}{\partial \beta }>0\) implies
Finally, notice that
where \(\varepsilon _{\pi ,z}\) is the elasticity of operational profits with respect to perceived quality and \(\varepsilon _{\varphi ,z}\) is the elasticity of advertising costs (conditional on a given \(\beta \)) with respect to perceived quality.
1.4 Proof of Lemma 1
Given \(\varphi (z)=z^{\gamma }\) and \(\theta (z)=(a+z)^{-1}a\), Eq. 49 becomes
This is increasing in \(z\). Since \(\frac{\partial z}{\partial \beta }<0\), it follows that \(\frac{\partial [ \beta \varphi (z)]}{\partial \beta }>0\).
Given \(\varphi (z)=z^{\gamma }\) and \(\theta (z)=e^{-bz}\), Eq. 49 becomes
Denoting the second hand side of 53 by \(\Upsilon _{1}\),
Notice that \([e^{bz}(bz-1)+1]\) is monotonically increasing in \(z\) and this function takes the value \(0\) when \(z=0\). Hence, \(\frac{d\Upsilon _{1}}{dz}>0,\forall z>0\). As in the previous case, this once again implies \(\frac{\partial [\beta \varphi (z)]}{\partial \beta }>0\).
Finally, given \(\varphi (z)=z^{\gamma }\) and \(\theta (z)=[ \ln (1+z)+1]^{-c}\), Eq. 49 becomes
Denoting the second hand side of 55 by \(\Upsilon _{2}\),
where
and
Notice that \(z>\ln (1+z),\forall z>0\). This ensures that \(\Gamma _{5}>0\). Next,
Since \((1+z)[\ln (1+z)+1]>1>cz-1,\forall z\in (0,c^{-1}]\) and \(cz\ge 0,\forall z\ge c^{-1}\), it follows that \(\frac{\partial \Gamma _{6}}{\partial z}>0,\forall z>0\). Finally, this condition may be combined with the fact that \(\Gamma _{6}\vert _{z=0}=0\) to obtain \(\Gamma _{6}>0,\forall z>0\). In conclusion, \(\frac{d\Upsilon _{2}}{dz}>0,\forall z>0,\) implying once again \(\frac{\partial [\beta \varphi (z)] }{\partial \beta }> 0\).
1.5 Proof of Lemma 2
Given \(\varphi (z)=z^{\gamma }\) and \(\theta (z)=(a+z)^{-1}a\), Eq. 33 becomes
The impact of changes in fixed operational costs is
Since \(\frac{\partial z(\cdot )}{\partial F_{Y}}>0\), Eq. 61 is positive for \(z(F_{Y},\beta )<a\). This occurs for low levels of \(F_{Y}\) and concentration. With higher levels of \(F_{Y}\) and concentration, perceived quality monotonically increases up to where \(z(F_{Y},\beta )>a\), making Eq. 61 negative. An inverted U-shape relation arises in this way.
Changes in marginal advertising costs yield similar conclusions, using
In this case, \(\frac{\partial z(\cdot ) }{\partial \beta }<0\). Equation 62 is then positive for \(z(F_{Y},\beta )>a\), which occurs for low levels of \(\beta \) and concentration. When \(z(F_{Y},\beta )<a\) (that is, with a higher \(\beta \) and concentration) the derivative becomes negative. Once again, an inverted U-shape relation arises.
Given \(\varphi (z)=z^{\gamma }\) and \(\theta (z)=e^{-bz}\), Eq. 33 becomes
The impact of changes in fixed operational costs is now
The proof is identical to the previous case. The same applies when \(\beta \) changes.
Finally, given \(\varphi (z)=z^{\gamma }\) and \(\theta (z)=[\ln (1+z)+1]^{-c}\), Eq. 33 becomes
The impact of changes in fixed operational costs is
The sign of this derivative depends on the sign of
\(\Gamma _{7}\) is decreasing on \(z\). In addition, \(\Gamma _{7}\vert _{z=0}>0\). Next, the first term in \(\Gamma _{7}\) increases at a decreasing rate, whereas the last one increases linearly in absolute value. Hence, \(\exists z^{*}\) \(s.t.\) \(\Gamma _{7}<0,\forall z>z^{*}\). The proof for the behavior of \(\frac{\partial \psi }{\partial F_{Y}}\) and \(\frac{\partial \psi }{\partial \beta }\) follows along the same lines of the previous cases.
1.6 Proof of Proposition 4
Combining Eqs. 29 and 33 yields
Advertising intensity \((\psi )\) or perceived quality \((z)\) do not depend on general equilibrium effects or the sensitivity of rates of return, that is, \((1-\alpha )\alpha \). However, as shown in Eq. 68, the higher this sensitivity is, the lower the concentration level associated with each value of \(\psi \).
Rights and permissions
About this article
Cite this article
Sá, N. Market concentration and persuasive advertising: a theoretical approach. J Econ 114, 127–151 (2015). https://doi.org/10.1007/s00712-013-0387-8
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00712-013-0387-8