IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Quality Sorting and Networking: Evidence from the Advertising Agency Industry

  • Mohammad Arzaghi

This paper provides a model of knowledge sharing and networking among single unit advertising agencies and investigates the implications of this model in the presence of heterogeneity in agencies’ quality. In a stylized screening model, we show that, under a modest set of assumptions, the separation outcome is a Pareto-undominated Nash equilibrium. That is, high quality agencies locate themselves in a high wage and rent area to sift out low quality agencies and guarantee their network quality. We identify a necessary condition for the separating equilibrium to exist and to reject the pooling equilibrium even in the presence of agglomeration economies from networking. We derive the maximum profit of an agency and show the condition has a directly testable implication in the empirical specification of the agency’s profit function. We use a sample of movers—existing agencies that relocate among urban areas—in order to extract a predetermined measure of their quality prior to relocation. We estimate the parameters of the profit function, using the Census confidential establishment-level data, and show that the necessary condition for separation is met and that there is strong separation and sorting on quality among agencies in their location decisions.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: ftp://ftp2.census.gov/ces/wp/2005/CES-WP-05-16.pdf
File Function: First version, 2005
Download Restriction: no

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 05-16.

as
in new window

Length: 39 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:cen:wpaper:05-16
Contact details of provider: Postal: 4600 Silver Hill Road, Washington, DC 20233
Phone: (301) 763-6460
Fax: (301) 763-5935
Web page: http://www.census.gov/ces
Email:


More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Edward L. Glaeser & Joseph Gyourko, . "The Impact of Zoning on Housing Affordability," Zell/Lurie Center Working Papers 395, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  2. John G. Riley, 1976. "Informational Equilibrium," UCLA Economics Working Papers 071, UCLA Department of Economics.
  3. Steven Berry & James Levinsohn & Ariel Pakes, 1998. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," NBER Working Papers 6481, National Bureau of Economic Research, Inc.
  4. Yabushita, Shiro, 1983. "Theory of Screening and the Behavior of the Firm: Comment," American Economic Review, American Economic Association, vol. 73(1), pages 242-45, March.
  5. Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Ron S Jarmin & Javier Miranda, 2002. "The Longitudinal Business Database," Working Papers 02-17, Center for Economic Studies, U.S. Census Bureau.
  7. G. Ellison & D. Fudenberg, 2010. "Rules of Thumb for Social Learning," Levine's Working Paper Archive 435, David K. Levine.
  8. Frank Windmeijer & Joao Santos Silva, 1996. "Endogeneity in count data models; an application to demand for health care," IFS Working Papers W96/15, Institute for Fiscal Studies.
  9. Glen Ellison, 2010. "Learning, Local Interaction, and Coordination," Levine's Working Paper Archive 391, David K. Levine.
  10. Dennis Epple & Holger Sieg, 1999. "Estimating Equilibrium Models of Local Jurisdictions," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 645-681, August.
  11. Maskin, Eric S, 1994. "The Invisible Hand and Externalities," American Economic Review, American Economic Association, vol. 84(2), pages 333-37, May.
  12. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  13. Davis, James C. & Henderson, J. Vernon, 2008. "The agglomeration of headquarters," Regional Science and Urban Economics, Elsevier, vol. 38(5), pages 445-460, September.
  14. Yi, Sang-Seung, 1997. "Stable Coalition Structures with Externalities," Games and Economic Behavior, Elsevier, vol. 20(2), pages 201-237, August.
  15. Patrick Bayer & Robert McMillan & Kim Rueben, 2005. "Residential Segregation in General Equilibrium," NBER Working Papers 11095, National Bureau of Economic Research, Inc.
  16. Schmalensee, Richard. & Silk, Alvin J. & Bojanek, Robert., 1981. "The impact of scale and media mix on advertising agency costs," Working papers 1269-81., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  17. Rappaport, Jordan & Sachs, Jeffrey D, 2003. " The United States as a Coastal Nation," Journal of Economic Growth, Springer, vol. 8(1), pages 5-46, March.
  18. John G. Riley, 1975. "Information,Screening and Human Capital," UCLA Economics Working Papers 064, UCLA Department of Economics.
  19. J. Vernon Henderson & Mohammad Arzaghi, 2005. "Networking Off Madison Avenue," Working Papers 05-15, Center for Economic Studies, U.S. Census Bureau.
  20. Henderson, Vernon, 1997. "Medium size cities," Regional Science and Urban Economics, Elsevier, vol. 27(6), pages 583-612, November.
  21. John Mullahy, 1997. "Instrumental-Variable Estimation Of Count Data Models: Applications To Models Of Cigarette Smoking Behavior," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 586-593, November.
  22. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  23. Jaffe, Adam B & Trajtenberg, Manuel & Henderson, Rebecca, 1993. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 577-98, August.
  24. Stuart S. Rosenthal & William C. Strange, 2003. "Geography, Industrial Organization, and Agglomeration," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 377-393, May.
  25. Paulo Guimaraes & Octavio Figueiredo & Douglas Woodward, 2000. "A tractable approach to the firm location decision problem," NIMA Working Papers 2, Núcleo de Investigação em Microeconomia Aplicada (NIMA), Universidade do Minho.
  26. Fujita, Masahisa & Ogawa, Hideaki, 1982. "Multiple equilibria and structural transition of non-monocentric urban configurations," Regional Science and Urban Economics, Elsevier, vol. 12(2), pages 161-196, May.
  27. Henderson, J. Vernon, 2003. "Marshall's scale economies," Journal of Urban Economics, Elsevier, vol. 53(1), pages 1-28, January.
  28. Debraj Ray & Rajiv Vohra, 2001. "Coalitional Power and Public Goods," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1355-1384, December.
  29. 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.
  30. Silk, Alvin J & Berndt, Ernst R, 1994. "Costs, Institutional Mobility Barriers, and Market Structure: Advertising Agencies as Multiproduct Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(3), pages 437-80, Fall.
  31. Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1257-78, December.
  32. Amil Petrin & Kenneth Train, 2003. "Omitted Product Attributes in Discrete Choice Models," NBER Working Papers 9452, National Bureau of Economic Research, Inc.
  33. Alvin J. Silk & Ernst R. Berndt, 1994. "Costs, Institutional Mobility Barriers, and Market Structure: Advertising Agencies as Multiproduct Firms," NBER Working Papers 4826, National Bureau of Economic Research, Inc.
  34. Riley, John G, 1979. "Testing the Educational Screening Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S227-52, October.
  35. Kenneth Train, 2003. "Discrete Choice Methods with Simulation," Online economics textbooks, SUNY-Oswego, Department of Economics, number emetr2, December.
  36. Bala, V. & Goyal, S., 1995. "Learning from Neighbors," Econometric Institute Research Papers EI 9549-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  37. Henderson, J Vernon, 1985. "Property Tax Incidence with a Public Sector," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 648-65, August.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cen:wpaper:05-16. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fariha Kamal)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.