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Competition, Monopoly and Corporate Governance

Essays in Honour of Keith Cowling

Edited by Michael Waterson

Competition, Monopoly and Corporate Governance covers three broad themes, each associated with a particular strand of Keith Cowling’s own writings in industrial economics and each represented by four specially commissioned papers.
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Chapter 12: Advertising and the Evolution of Market Structure in the US Car Industry

Paul A. Geroski and M. Mazzucato


1 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 profitably operate in a market. On the other hand, firms can use advertising to attract attention to their products and induce switching behaviour by consumers. It is, therefore, possible that advertising can also facilitate entry, and that entrants who attempt to advertise their way into a market may partially or even totally displace incumbents, gaining enough sales revenue to cover their fixed costs even in a stagnant market. If this happens, one...

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