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Concentration Levels in the U.S. Advertising and Marketing Services Industry: Myth vs. Reality

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  • Alvin J. Silk

    ()
    (Harvard Business School)

  • Charles King III

    ()
    (Greylock McKinnon Associates, Cambridge, MA)

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    Abstract

    This paper analyzes changes in concentration levels in the U.S. Advertising and Marketing Services (A&MS) industry using publicly released data that have been largely ignored in past discussions of the industrial organization of this industry, namely those available from the U.S. Census Bureau's quinquennial Economic Census and the Service Annual Survey. We define the A&MS industry in terms of nine sectors, each of which is represented by a separate 5 digit NAICS category. In so doing, we have sought to redress some of the measurement problems surrounding estimates found in the existing literature. Our main findings are threefold. First, in the case of the core and largest sector, Advertising Agencies, firm level concentration as measured by Herfindahl-Hirschman Index (HHI) increased slightly but remained relatively low from 1977 to 2002. All of the HHI estimates readily satisfied the standard widely used to characterize an industry as "unconcentrated." We find mixed support for the hypotheses that the ranks of mid-sized agencies were depleted by ongoing waves of mergers and acquisitions and resulted in a polarized size structure. The size distributions of agency revenue have become more polarized in the sense that over time they appear more skewed, more dispersed, and exhibit greater inequality. The share of total receipts realized by small agencies fell while that of large agencies rose. However, the position of mid-sized agencies appears to have changed little over the period 1977- 2002, as measured by the shares of agencies and receipts they represent. Second, concentration levels in 1997 and 2002 varied across the nine sectors comprising the A&MS industry, but all were within the range generally considered as indicative of a competitive industry. Third, we developed concentration ratios at the level of holding companies (HC's) and find that the four largest HC's captured between a fifth and a quarter of total revenue from the A&MS industry, a share that remained quite stable over the period, 2002-2006. These estimates are lower by an order of magnitude than estimates often cited in the trade press. Reasons for the discrepancy are discussed.

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    Bibliographic Info

    Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 09-044.

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    Length: 46 pages
    Date of creation: Sep 2008
    Date of revision:
    Handle: RePEc:hbs:wpaper:09-044

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Lawrence J. White, 2002. "Trends in Aggregate Concentration in the United States," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 137-160, Fall.
    2. Horst Mendershausen, 1946. "Changes in Income Distribution During the Great Depression," NBER Books, National Bureau of Economic Research, Inc, number mend46-1.
    3. Mohammad Arzaghi & Ernst R. Berndt & James C. Davis & Alvin J. Silk, 2008. "Economic Factors Underlying the Unbundling of Advertising Agency Services," NBER Working Papers 14345, National Bureau of Economic Research, Inc.
    4. MacDonald, Glenn M & Slivinski, Alan, 1987. "The Simple Analytics of Competitive Equilibrium with Multiproduct Firms," American Economic Review, American Economic Association, vol. 77(5), pages 941-53, December.
    5. Charles King & Alvin J. Silk & Niels Ketelhöhn, 2003. "Knowledge Spillovers and Growth in the Disagglomeration of the Us Advertising-Agency Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(3), pages 327-362, 09.
    6. Schmalensee, Richard, 1977. "Using the H-Index of Concentration with Published Data," The Review of Economics and Statistics, MIT Press, vol. 59(2), pages 186-93, May.
    7. Sharon Horsky, 2006. "The Changing Architecture of Advertising Agencies," Marketing Science, INFORMS, vol. 25(4), pages 367-383, 07-08.
    8. Frederic Pryor, 2001. "New Trends in U.S. Industrial Concentration," Review of Industrial Organization, Springer, vol. 18(3), pages 301-326, May.
    9. Richard van der Wurff & Piet Bakker & Robert Picard, 2008. "Economic Growth and Advertising Expenditures in Different Media in Different Countries," Journal of Media Economics, Taylor & Francis Journals, vol. 21(1), pages 28-52.
    10. Alvin J. Silk & Ernst R. Berndt, 1993. "Scale and Scope Effects on Advertising Agency Costs," Marketing Science, INFORMS, vol. 12(1), pages 53-72.
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