Geroski, Paul A.; Mazzucato, M. --- "Advertising and the Evolution of Market Structure in the US Car Industry" [2003] ELECD 91; in Waterson, Michael (ed), "Competition, Monopoly and Corporate Governance" (Edward Elgar Publishing, 2003)

Book Title: Competition, Monopoly and Corporate Governance

Editor(s): Waterson, Michael

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781843760894

Section: Chapter 12

Section Title: Advertising and the Evolution of Market Structure in the US Car Industry

Author(s): Geroski, Paul A.; Mazzucato, M.

Number of pages: 26

Extract:

12. Advertising and the evolution of
market structure in the US car
industry1
Paul A. Geroski and M. Mazzucato

1. INTRODUCTION2

It is widely believed that an industry with high levels of sunk costs is likely
to be more highly concentrated than one with lower levels of sunk cost
(Sutton, 1991). This proposition is sometimes taken to suggest that an
increase in sunk costs will lead to a rise in concentration. When expressed
in this form, this proposition would, for example, lead one to expect that
the escalation of advertising which occurred at the end of the 1970s in the
US car industry ­ an increase of more than eightfold (in nominal terms)
from the early-middle 1970s through to the late-middle 1990s ­ would have
increased the level of concentration in the industry. In fact, concentration
actually fell during that period.
To understand what might underlie this puzzle, one needs to recognise
that advertising can have two rather different effects on competition. On the
one hand, advertising expenditures are both fixed and (usually) sunk, and
this can serve to limit entry and reduce the number of firms that can profit-
ably operate in a market. On the other hand, firms can use advertising to
attract attention to their products and induce switching behaviour by con-
sumers. It is, therefore, possible that advertising can also facilitate entry,
and that entrants who attempt to advertise their way into a market may par-
tially or even totally displace incumbents, gaining enough sales revenue ...