DP2860 Advertising and the Evolution of Market Structure in the US Car Industry

Author(s): Paul A Geroski , Mariana Mazzucato

Publication Date: June 2001

Keyword(s): Advertising , entry , US car industry

JEL(s): L10 , L62

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP2860.asp

This Paper focuses on a single simple stylized fact which stands out from the post-war history of the US Car industry, namely that industry concentration fell just at the same time as industry advertising expenditures rose sharply. Since both events were almost certainly caused by the entry and market penetration of (largely) foreign owned car producers, this stylized fact raises interesting questions about whether – and if so, how advertising affects entry. We use a model of consumer switching behaviour to help interpret the facts. The model predicts a simple linear association between market and advertising shares (which we observe fairly clearly at two different levels of aggregation in the data), and provides the basis for arguing that advertising can facilitate entry, but only for finite periods of time.