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Advertising and Competition in Privatized Social Security: The Case of Mexico

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  • Justine S. Hastings
  • Ali Hortaçsu
  • Chad Syverson

Abstract

This paper examines how advertising impacts competition and equilibrium prices in the context of a privatized pension market. We use detailed administrative data on fund manager choices and worker characteristics at the inception of Mexico’s privatized social security system, where fund managers had to set prices (management fees) at the national level, but could select sales force levels by local geographic areas. We develop a model of fund manager choice, price and advertising competition (in terms of sales force deployment), nesting models of informative and persuasive advertising. We find evidence in favor of the persuasive view; exposure to sales force lowered price sensitivity and increased brand loyalty, leading to inelastic demand and high equilibrium fees. We simulate oft-proposed policy solutions: a supply-side policy with a competitive government player, and a demand-side policy which increases price elasticity. We find that demand-side policies are necessary to foster competition in social-safety-net markets with large segments of inelastic consumers.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18881.

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Date of creation: Mar 2013
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Handle: RePEc:nbr:nberwo:18881

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  1. Benham, Lee, 1972. "The Effect of Advertising on the Price of Eyeglasses," Journal of Law and Economics, University of Chicago Press, vol. 15(2), pages 337-52, October.
  2. Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, Elsevier.
  3. Victor Stango, 2002. "Strategic responses to regulatory threat in the credit card market," Working Paper Series WP-02-02, Federal Reserve Bank of Chicago.
  4. Justine Hastings & Olivia S. Mitchell, 2010. "How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors," Working Papers wp233, University of Michigan, Michigan Retirement Research Center.
  5. Becker, Gary S & Murphy, Kevin M, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 941-64, November.
  6. Martin Feldstein, 2005. "Structural Reform of Social Security," NBER Working Papers 11098, National Bureau of Economic Research, Inc.
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  8. Jeffrey Milyo & Joel Waldfogel, 1998. "The Effect of Price Advertising and Prices: Evidence in the Wake of 44 Liquormart," NBER Working Papers 6488, National Bureau of Economic Research, Inc.
  9. Benjamin R. Handel, 2011. "Adverse Selection and Switching Costs in Health Insurance Markets: When Nudging Hurts," NBER Working Papers 17459, National Bureau of Economic Research, Inc.
  10. Feldstein, Martin, 2005. "Structural Reform of Social Security," Scholarly Articles 2794830, Harvard University Department of Economics.
  11. Jason Abaluck & Jonathan Gruber, 2011. "Choice Inconsistencies among the Elderly: Evidence from Plan Choice in the Medicare Part D Program," American Economic Review, American Economic Association, vol. 101(4), pages 1180-1210, June.
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  13. James J. Choi & David Laibson & Brigitte C. Madrian, 2010. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1405-1432, April.
  14. Justine S. Hastings & Brigitte C. Madrian & William L. Skimmyhorn, 2012. "Financial Literacy, Financial Education and Economic Outcomes," NBER Working Papers 18412, National Bureau of Economic Research, Inc.
  15. Pradeep K. Chintagunta & Ramarao Desiraju, 2005. "Strategic Pricing and Detailing Behavior in International Markets," Marketing Science, INFORMS, vol. 24(1), pages 67-80, June.
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  17. Ioana Chioveanu, 2005. "Advertising, Brand Loyalty And Pricing," Working Papers. Serie AD 2005-32, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  18. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 505-540, May.
  19. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  20. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
  21. Fabian Duarte & Justine S. Hastings, 2012. "Fettered Consumers and Sophisticated Firms: Evidence from Mexico's Privatized Social Security Market," NBER Working Papers 18582, National Bureau of Economic Research, Inc.
  22. Ali Hortaç Su & Chad Syverson, 2004. "Product Differentiation, Search Costs, And Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 403-456, May.
  23. Glazer, Amihai & McMillan, Henry, 1992. "Pricing by the Firm under Regulatory Threat," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 1089-99, August.
  24. Justine S. Hastings & Lydia Tejeda-Ashton, 2008. "Financial Literacy, Information, and Demand Elasticity: Survey and Experimental Evidence from Mexico," NBER Working Papers 14538, National Bureau of Economic Research, Inc.
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Cited by:
  1. Miller, Margaret & Reichelstein, Julia & Salas, Christian & Zia, Bilal, 2014. "Can you help someone become financially capable ? a meta-analysis of the literature," Policy Research Working Paper Series 6745, The World Bank.
  2. Lint Barrage & Eric Chyn & Justine Hastings, 2014. "Advertising, Reputation, and Environmental Stewardship: Evidence from the BP Oil Spill," NBER Working Papers 19838, National Bureau of Economic Research, Inc.

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