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The Competitive Effects of Advertising in the US Automobile Industry, 1970-94

Author Info

Listed author(s):
  • Matthias Greuner
  • David Kamerschen
  • Peter Klein

Abstract

Is advertising anticompetitive? One school of thought in industrial economics holds that advertising increases profits and reduces consumer welfare by creating spurious product differentiation and barriers to entry. Another school focuses on the informative character of advertising, claiming that advertising makes markets more competitive and reduces profits by supplying consumers with information about price and quality. We distinguish these views by examining the effect of advertising on competition in the US automobile industry. Our data include advertising, sales, profit, and market-share figures for General Motors, Ford, and Chrysler over a 25-year period from 1970 to 1994.We ask if advertising increases or decreases profitability, controlling for market structure and other factors affecting demand.Wefind that these firms cannot increase their profits above normal levels by increasing their advertising expenditures. This evidence supports the view that advertising serves primarily to transmit information, not to create entry barriers.

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File URL: http://www.tandfonline.com/10.1080/13571510050197177
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Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 7 (2000)
Issue (Month): 3 ()
Pages: 245-261

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Handle: RePEc:taf:ijecbs:v:7:y:2000:i:3:p:245-261
DOI: 10.1080/13571510050197177
Contact details of provider: Web page: http://www.tandfonline.com/CIJB20

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Keywords: Automobile Industry; Advertising; Competition; Entry Barriers; Information;

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  16. Sutton, C J, 1974. "Advertising, Concentration and Competition," Economic Journal, Royal Economic Society, vol. 84(333), pages 56-69, March.
  17. Bloch, Harry, 1974. "Advertising and Profitability: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 267-286, Part I, M.
  18. Ayanian, Robert, 1975. "Advertising and Rate of Return," Journal of Law and Economics, University of Chicago Press, vol. 18(2), pages 479-506, October.
  19. Kwoka, John E, Jr, 1993. "The Sales and Competitive Effects of Styling and Advertising Practices in the U.S. Auto Industry," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 649-656, November.
  20. Nagle, Thomas T, 1981. "Do Advertising-Profitability Studies Really Show That Advertising Creates a Barrier to Entry?," Journal of Law and Economics, University of Chicago Press, vol. 24(2), pages 333-349, October.
  21. Weiss, Leonard W, 1969. "Advertising, Profits, and Corporate Taxes," The Review of Economics and Statistics, MIT Press, vol. 51(4), pages 421-430, November.
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Cited by:

  1. Chen, Chien-Ming & van Dalen, Jan, 2010. "Measuring dynamic efficiency: Theories and an integrated methodology," European Journal of Operational Research, Elsevier, vol. 203(3), pages 749-760, June.

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