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The effect of retail competition on relationship-specific investments: evidence from new car advertising

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  • Murry, Charles

Abstract

Longstanding state regulations restrict car manufacturers from terminating relationships with dealers, creating differences in retail competition across brands and markets. I use this variation to identify the causal effect of dealer competition on dealer and manufacturer local market advertising. I find that greater intra-brand dealer competition is associated with lower dealer advertising. US brand manufacturers decrease advertising with an additional same-brand dealer, but there is zero average effect for non-US brand manufacturers. The results are evidence that manufacturers can encourage retail relationship-specific investments by providing downstream market power. I discuss theories of oligopoly and vertical relationships that may explain the results and the relevance of the findings to the effects of state automobile franchise regulation and the recent financial troubles of US car manufacturers.

Suggested Citation

  • Murry, Charles, 2018. "The effect of retail competition on relationship-specific investments: evidence from new car advertising," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 253-281.
    • Handle: RePEc:eee:indorg:v:59:y:2018:i:c:p:253-281
    DOI: 10.1016/j.ijindorg.2018.03.010
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    Cited by:

    1. Charles Murry & Yiyi Zhou, 2020. "Consumer Search and Automobile Dealer Colocation," Management Science, INFORMS, vol. 66(5), pages 1909-1934, May.
    2. Charles Murry & Peter Newberry, 2022. "Franchise Contract Regulations and Local Market Structure," Journal of Law and Economics, University of Chicago Press, vol. 65(1), pages 105-130.
    3. Lamar Pierce & Alex Rees-Jones & Charlotte Blank, 2020. "The Negative Consequences of Loss-Framed Performance Incentives," NBER Working Papers 26619, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Franchise regulation; Non-price competition; Automobile retailing; Vertical relationships;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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