Advertising and the Evolution of Market Structure in the Us Car Industry

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. JEL Classification: L10, L62 Preliminary Draft: Please do not cite without the permission of the authors; comments are most welcome. * We are obliged to the ESRC for financial support, and to Mike Scherer, Dick Schmalensee, John Scott, Steve Martin and seminar participants at the IFS, WIFO, University of Essex, Nova University and Bocconi University for helpful comments on an early draft. The usual disclaimer applies. _______________________________________________________________________ _______________________________________________________________________ 2