Advertising Intensity and Concentration Change in Manufacturing Industries Robert John Tokle Iowa State University
Total Page:16
File Type:pdf, Size:1020Kb
Iowa State University Capstones, Theses and Retrospective Theses and Dissertations Dissertations 1986 Advertising intensity and concentration change in manufacturing industries Robert John Tokle Iowa State University Follow this and additional works at: https://lib.dr.iastate.edu/rtd Part of the Economics Commons Recommended Citation Tokle, Robert John, "Advertising intensity and concentration change in manufacturing industries " (1986). Retrospective Theses and Dissertations. 8318. https://lib.dr.iastate.edu/rtd/8318 This Dissertation is brought to you for free and open access by the Iowa State University Capstones, Theses and Dissertations at Iowa State University Digital Repository. It has been accepted for inclusion in Retrospective Theses and Dissertations by an authorized administrator of Iowa State University Digital Repository. For more information, please contact [email protected]. INFORMATION TO USERS While the most advanced technology has been used to photograph and reproduce this manuscript, the quality of the reproduction is heavily dependent upon the quality of the material submitted. For example: • Manuscript pages may have indistinct print. In such cases, the best available copy has been filmed. • Manuscripts may not always be complete. In such cases, a note will indicate that it is not possible to obtain missing pages. • Copyrighted material may have been removed from the manuscript. In such cases, a note will indicate the deletion. Oversize materials (e.g., maps, drawings, and charts) are photographed by sectioning the original, beginning at the upper left-hand comer and continuing from left to right in equal sections with small overlaps. Each oversize page is also filmed as one exposure and is available, for an additional charge, as a standard 35mm slide or as a 17"x 23" black and white photographic print. Most photographs reproduce acceptably on positive microfilm or microfiche but lack the clarity on xerographic copies made from the microfilm. For an additional charge, 35mm slides of 6"x 9" black and white photographic prints are available for any photographs or illustrations that cannot be reproduced satisfactorily by xerography. 8703777 Tokle, Robert John ADVERTISING INTENSITY AND CONCENTRATION CHANGE IN MANUFACTURING INDUSTRIES Iowa State University PH.D. 1986 University Microfilms Internstion&l 300 N. zeeb Road, Ann Arbor, Ml 48106 Advertising intensity and concentration change in manufacturing industries by Robert John Tokle A Dissertation Submitted to the Graduate Faculty in Partial Fulfillment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY Major: Economics Approved: Signature was redacted for privacy. Charge of Major Work Signature was redacted for privacy. For the Major Department Signature was redacted for privacy. For the Graduate College Iowa State University Ames, Iowa 1986 ii TABLE OF CONTENTS Page CHAPTER I. INTRODUCTION I Retail and National Advertising 2 Case Studies of Retail and National Advertising 5 Dissertation Overview 9 Use of concentration ratios 9 Use of advertising intensities 12 CHAPTER II. REVIEW OF RELEVANT LITERATURE 14 The First Generation of Concentration Change Models 15 The Second Generation of Concentration Change Models 20 The Third Generation of Concentration Change Models 28 Reasons for this Study 38 CHAPTER III. RATIONALE FOR THE INCLUSION OF EACH INDEPENDENT VARIABLE 48 Initial Concentration Ratio 48 Size 53 Industry Growth Rate 53 Research and Development Dummy Variable 58 Convenience Good Dummy Variable 59 Consumer Good Dummy Variable 62 Advertising Intensity 62 Omitted Variables 73 CHAPTER IV. THE SAMPLE AND VARIABLE CONSTRUCTION 77 The Sample 77 iii Page Variable Construction 81 Concentration ratio change (ACR) 81 Initial concentration ratio (ICR) 81 Industry size (S) 81 Industry growth rates (G) 81 Research and development dummy variable (RD) 83 Convenience good dummy variable (CONV) 83 Consumer good dummy variable (CONS) 84 Advertising intensity 84 CHAPTER V. EMPIRICAL RESULTS 93 Descriptive Statistics of Advertising Intensity 93 Descriptive Statistics of Concentration Change 99 Regression Results 107 The basic model 108 Correlation coefficients of variables for 1967-1982 109 Regression results for 1967-1982 112 Regression results for 1963-1982 128 Regression results for 1963-1972 and 1972-1982 133 Regression results for 5-year subperiods of 1963-1982 137 CHAPTER VI. SUMMARY AlSi'D CONCLUSIONS 143 Initial Concentration Ratio (ICR) 145 Size (S) 145 Growth (G) 146 Research and Development Dummy Variables (RD) 147 Convenience Good Dummy Variable (CONV) 147 Consumer Good Dummy Variable (CONS) 147 Advertising Intensity (Levels and Changes) 148 REFERENCES 151 ACKNOWLEDGMENTS 158 1 CHAPTER I. INTRODUCTION There are two basic theoretical views of how advertising effects competition. One school of thought suggests that advertising decreases competition. Kaldor (1950) argued that through advertising economies of scale, advertising increases market concentration. Also, Bain (1956) suggested that advertising causes strong product differentiation and brand loyalty, which are barriers to entry and will lead to higher concentration. The opposite school of thought believes that advertising increases competition. Most noted here is Nelson (1970, 1974), who argues in his first paper that advertising increases information to the consumer, which makes demand curves more elastic, putting downward pressure on prices. Also, he argues advertising allows for easier entry by new firms. In his second paper, Nelson concludes that advertising provides direct information on relative product quality. With this extra information, the consumer is a more careful shopper, making the markets more competitive. Hence, there are plausible economic arguments on both sides of the issue: does advertising increase or decrease competition? Comanor and Wilson (1979, p. 457) state, "While these theoretical models are important for their explanations of how advertising might work, it is evident that no consensus has developed." 2 Retail and National Advertising It is true that there is no consensus on advertising's effects on competition. However, this is in large part due to treating all advertising homogeneously. It is helpful to separate advertising into two different types, retail and national. Retail advertising consists of advertising that contains a high degree of information. Examples include the classified ads in newspapers, the yellow pages, some mail-order catalogs, and some retail store ads. This increase of information to the consumer tends to make the markets more efficient and competitive. Going back to Nelson's arguments, more information will make market demand curves more elastic, putting downward pressure on prices. Also, this information could help new entrants to overcome loyalty and familiarity with established products. Therefore, retail advertising in most cases is likely to be procompetitive. In contrast, national advertising consists largely of advertising run by manufacturers. As will be shown below, it tends to rely more on persuasion than information to sell products. Also, it is dominated by television advertising which gives larger firms many advantages. (These will be covered in detail in Chapter III.) And, it is concentrated. While retail advertising is done by many millions of businesses, national advertising is dominated by relatively few. Currently, the top 100 manufacturers account for roughly one-half of all national advertising (Morris, 1984, p. 49). Therefore, national advertising in most cases is likely to be anticompetitive. Norris (1984, p. 47) writes that: Retail and national advertising are so different if not 3 contradictory in function that it is unfortunate the same word applies to both. But, since it does, distinguishing one from the other is of utmost importance. With surprising frequency, writers fail to do so, generalizing from one to the other. At least two types of studies have confirmed that national advertising has more persuasion than information content. The first type is content analysis of commercials. At least three of these studies analyzed TV commercials; Resnik and Stern (1977), Reid and Rotfeld (1981), and Pollay et al. (1980). All three studies generated similar results, that television commercials have little if any information content. I will give the Resnik and Stern (1977) results in more detail. Three hundred seventy-eight television commercials broadcasted by the three major networks were reviewed during all periods of a week in April 1975. The information content of the commercials was tested by looking for 14 different information clues (price or value, quality, performance, components or contents, availability, special offers, taste, packaging or shape, guarantees or warranties, safety, nutrition, independent research, company-sponsored research, and new ideas). However, no information clue was challenged for truthfulness, credibility, or soundness of evidence presented. Despite the lenient evaluation criteria, only 49 percent of the commercials had at least one information clue, while 16 percent had two clues, and only 1 percent had three clues. The second type of study that implies that national advertising contains more persuasion than information is the request that producers substantiate claims made by their advertising. One example is a study by Woodside (1977), who requested substantiation from 27 television and 27 4 magazine advertisers. Only 22.2 percent responded satisfactorily. The others either did