A Cointegration Analysis of Car Advertising and Sales Data in the Presence of Structural Change

This paper examines whether there is a long‐run stable equilibrium relationship between advertising and sales across the market segments of the UK car industry over the period 1971–2001. In order to achieve this goal, we allow for structural breaks in the series using cointegration techniques. The results show the existence of long‐run equilibrium relationships in all six market segments, although in four of them the relationship is not stable. In general, one structural change is detected in the late 1970s and another in the early 1990s, coinciding with two economic recessions. When we do not account for structural changes, the estimated long‐run elasticities of advertising on sales are seen to be substantially downwardly biased. Finally, a noticeable increase is observed in long‐run elasticities in most car market segments during the nineties with respect to previous decades.     

Leapfrogging in a Vertical Product Differentiation Model

The model considers a two-period duopoly game where in the first period the leader produces a good with a given quality and the other firm can only imitate it. It is the Stackelberg case where, in addition, the leader has the choice of the quality of the good and the imitation is costly, but not prohibitively so. Under this assumption quantities and profits in terms of the quality are derived as subgame perfect equilibrium. In the second period there exists the possibility for the leader and/or the follower to make an investment. The outcome of this is uncertain: it could either be the case that a good of better quality can be introduced, or that a cost-reduction in producing the existing good is attained. The former case is a product innovation, whereas the latter case is a process innovation. By solving the game backwards as a function of the quality of the first period, there exists the possibility of an equilibrium where the follower chooses to invest and the leader does not invest .     

Advertising,Price and Quality in Self–regulating Professions: A Survey

This paper surveys the theoretical and empirical literature on the relationship between advertising, fees and quality in the self–regulating professions. Much of the literature is derived from the perspective of advertising as an information–enhancing device, helping to reduce the information asymmetry between professional and client. This is consistent with the majority of the empirical studies which suggest that advertising tends to have a downward effect on professional fees, with little if any adverse effect on quality. There are, however, important issues of method and measurement which may lessen the force of this conclusion     

Product Differentiation,Industry Concentration and Market Share Turbulence

Building on the current theory of industrial concentration, we analyze the relation between market size and product differentiation, and show how product differentiation impacts market share turbulence. We first propose that in markets where vertical product differentiation dominates, firms will have an incentive to escalate investment in advertising and/or R&D as market size increases. Secondly, such (firm‐specific) investments will make competitive advantage more sustainable as the firm is less imitable. This will not be the case if the market is primarily characterized by homogeneous products or horizontal product differentiation. Our predictions are tested using an original EU dataset for 1987 and 1997. Our results strongly support our predictions – the degree of market share turbulence increases with market size. However, this relation is weakened by competitive investment in advertising and R&D.     

Market Structure,Learning and Product Innovation: Evidence for the EPROM Market

The study analyses the market for semiconductor memory chips, in particular EPROMs. Semiconductors are very interesting industry for studying empirically the dynamics of innovation. Given the short product life cycles of generations of chips, the market dynamics unfold much more rapidly than in other industries and are therefore better amenable to empirical observation. One of the aims is to shed more light on the link between learning and the dynamics of product innovation, as well as their influence on market structure. Learning with an old generation turns out to be an important determinant for product innovation. The further down the firm has moved on the learning curve, the higher its market share, and the larger becomes the probability that the firm is an early innovator. The results are consistent with the persistence of leadership hypothesis.     

Information Technology and Consumer Search for Health Insurance

We explore the impact of information technology on the level of premiums paid for individual health insurance by asking which kinds of buyers will have larger gains from the use of new technology. We compare ‘asking price’ data posted on an electronic insurance exchange with survey data on premiums actually paid before the advent of exchange and examine whether the pattern of differences between asking prices and transactions prices can be explained using a simple search theory. We hypothesize that older consumers, expecting to pay higher premiums for a given policy, had engaged in more intensive search than younger consumers, given the same distribution of prices and search costs. Therefore, the introduction of an electronic exchange that lowers the cost of search should have a larger effect on decreasing the level of premiums paid for those who previously searched less (i.e., younger consumers). We find evidence consistent with this hypothesis.     

Advertising and Steiner’s Dual Stage Model: Our Assessment

Between 1967 and 1979, we produced a number of studies that explored different facets of the economics of advertising. This work culminated in our 1974 book entitled Advertising and Market Power. Our leading hypothesis was that heavy advertising expenditures often but not always had anti‐competitive effects. And our primary empirical evidence in support of this hypothesis was that industries with heavy advertising expenditures also reported higher profit rates, which we interpreted as indicating that higher prices followed when manufacturers can effectively spend large amounts on advertising. Since that time, Robert Steiner has developed a model of firm behaviour for consumer goods industries. He finds that distribution margins are generally higher where manufacturer prices are lower. Furthermore, heavy manufacturer advertising is likely to depress distribution margins for heavily advertised products. While our earlier work implicitly assumed that distribution margins are generally the same regardless of the volume of advertising, Steiner’s results raise doubt on this assumption. Steiner’s model must therefore be acknowledged when interpreting our earlier findings.     

Product Differentiation,the Volume of Trade and Profits under Cournot and Bertrand Duopoly

This article analyses how product differentiation affects the volume of trade under duopoly using Shubik-Levitan demand functions rather than the Bowley demand functions used by Bernhofen (2001). The drawback of Bowley demand functions is that an increase in product differentiation increases the size of the market so the increase in the volume of trade may be the result of the increase in the size of the market rather than the increase in product differentiation per se. The Shubik-Levitan demand functions have the advantage that an increase in product differentiation does not increase the size of the market, but consumers still have a ‘love of variety’. It is shown that the volume of trade in terms of quantities falls with increasing product differentiation when the trade cost is relatively low, but rises with increasing product differentiation when the trade cost is relatively high. Among the results, it is shown that the trade liberalisation is more likely to be profitable under Cournot duopoly than under Bertrand duopoly for differentiated products with a positive trade cost.     

Would You Like to be a Prosumer? Information Revelation,Personalization and Price Discrimination in Electronic Markets

Electronic commerce and flexible manufacturing allow personalization of initially standardized products at low cost. Will customers provide the information necessary for personalization? Assuming that a consumer can control the amount of information revealed, we analyze how her decision interacts with the pricing strategy of a monopolist who may abuse the information to obtain a larger share of total surplus. We consider two scenarios, one where consumers have different tastes but identical willingness to pay and another with high and low valuation customers. In both cases full revelation may only result if the monopolist can commit to a maximum price before consumers decide about disclosure.     

Strategic Investment Decisions under Uncertainty,Tacit Collusion and Product Differentiation

This paper examines the effects of uncertainty, tacit collusion and product differentiation on strategic investment policy. The model demonstrates the equilibrium under competitive investments and under cooperative investments. In competitive investments, two firms compete by investing to preempt each other, and ultimately one firm invests earlier than its rival. In cooperative investments, two firms invest simultaneously and collude on their outputs. Cooperative investments are likely to be sustainable only under conditions of high volatility of future demand, low probability of market extinction and high degree of product differentiation, while competitive investments are sustainable for any set of these parametric values.     

Generic Competition in the US Pharmaceutical Industry

We develop a simultaneous equations estimation framework to understand the interactions among generic entry, prices, and market shares. We base our estimates on a panel data sample of 40 brand‐name drugs that first experienced generic competition during the period July 1992–January 1998. We find that generic share and price are simultaneously determined, while the number of generic entrants is a key determinant of generic market share and the generic‐to‐brand price ratio. In addition, we find generic competition to be particularly intense for blockbuster drugs, which experience significantly more generic entrants, price erosion, and generic penetration than other drugs.     

Are Unbundled and Self‐supplied Telecommunications Switching Substitutes? An Empirical Study

The Telecommunications Act of 1996 requires incumbent monopoly phone companies to lease elements of their networks to rivals. An important policy question is whether these unbundled elements are substitutes for entry modes that are more facilities‐based. In this article, we estimate demand curves for unbundled elements with the goal of assessing cross‐price effects between two of the more popular entry modes that differ in the mix of unbundled and self‐supplied inputs. As expected, we find downward sloping demand curves for unbundled elements. We also find own‐price elasticities in the elastic region of demand. What we do not find is evidence of substitution; we are able to reject the hypothesis of effective substitution between the two entry modes.     

Industry Self‐Regulation: A Game‐Theoretic Typology of Strategic Voluntary Compliance

We analyse the possibility of successful industry self‐regulation in terms of the strategic interactions between industry members and government. In particular, this article presents a game‐theoretic typology of generic self‐regulatory scenarios and evaluates these in terms of the resulting likelihood of collective compliance. We discuss the advertising, press and life insurance industries in the UK as examples of the scenarios. Conclusions for corporate and public policy are offered.     

Vertical Relationships in the Automotive Industry: Do They Matter?

In this note we examine how vertical relationships are related to the efficiency of the operations in the automotive production chain. We first provide an overview of the nature of supplier arrangements by comparing current practices in the countries Japan, US, and Germany. Current best practices show that vertical linkages in the automotive industry have shifted away from simple market transactions and now involve closer long-term interactions coupled however with subtle incentive elements. We outline the economic issues which are present in vertical relationships and include a brief account of differing theoretical perspectives. Then, we use a refined methodology to measure productivity at the industry level for the supplier industries automotive parts and metalworking and for the final assembly industry. It turns out that Japanese industries achieve the highest productivity level at the supplier and at the assembly level. We interpret the empirical results and relate the differences in vertical arrangemen s with the efficiency of both parts in the relation.     

Double Deflation and the Measurement of Output and Productivity in UK Manufacturing 1979–89

The objective of this paper is to examine the impact of applying double deflation methods to the measurement of productivity growth in UK manufacturing between 1979 and 1989. A number of alternative indicators of output growth are considered and it is argued that double deflated value added is the superior concept to employ for the measurement of productivity. It is shown that output measured by double deflated value added fell by 0.05% over the period between 1979 and 1989 whereas the official series indicates that output rose by 12.2% over the period. Measuring productivity as output per person employed, the double deflated value added measure indicates that between 1979 and 1989productivity increased by 34%> whereas the official series indicates an increase of 51 %. Whereas the latter may indicate a productivity miracle the former does not     

Defining Markets for Ex Ante Regulation using the Hypothetical Monopoly Test

The EU is gradually systematizing its approach to ex ante regulation (notably with the publication of the recent regulatory framework for Electronic communications). Market definition is viewed as an essential first step in this, with the ‘Hypothetical Monopoly Test’ a useful conceptual tool for use in the assessment. This paper examines the use of this test for market definition when there are several differentiated goods or services under consideration. It sets out an analytic framework, discusses the pros and cons of using the test and illustrates its use in a Telecom context.     

The Survival of Family Firms: The Importance of Control and Family Ties

The aim of this article is to analyze the survival patterns of a group of family firms which have already spent at least 25 years in the market. To this end, we use the Kaplan–Meier product limit estimator supplemented with qualitative information gathered by direct observation and discussions with entrepreneurs. The main findings are that small family firms which have reached their 30th year in the market face a very high risk of sudden exit, increasing with firm age. Further control carried out by means of interviews with entrepreneurs identifies problems connected with succession as one of the main causes of the decision to close down.     

In or out? explaining state shares of the tobacco Master Settlement Agreement

In 1998, 46 states were involved in a Master Settlement Agreement (MSA) with the tobacco industry. The other four states settled on their own. Our goal is to answer a counter factual question: how would these four states have fared had they been included in the MSA? We use data from Viscusi (2002 Viscusi WK (2002) Smoke‐Filled Rooms Chicago University of Chicago Press  [Google Scholar]) to explain settlement shares for states participating in the 1998 tobacco MSA, and to predict settlement shares for the four nonparticipating states. We find that two nonparticipating states (Minnesota and Mississippi) may have fared substantially worse had they been included in the MSA.     

Corporate Social Responsibility as a Signalling Device for Foreign Direct Investment

A rise in CSR (corporate social responsibility) has accompanied rise in foreign direct investment (FDI) to developing countries in the 1990s. CSR may be serving a signalling function when the entering firm is of an unknown type. Although countries are now competing keenly to attract foreign firms, even so, excessive tax or excess transfers by firms can still cause a Prisoner’s Dilemma structure to the payoffs resulting in an inefficient Nash equilibrium. CSR allows the accommodating firm to reveal its type, making cooperation the equilibrium outcome. The game differs from standard models since signalling changes the payoffs. A unique separating equilibrium exists where only the accommodating firms signal. But, under certain parameter values, a pooling equilibrium where all firms signal, becomes possible. A number of results are derived including the size of CSR expenditure required as a fraction of profits. An example demonstrates their relevance in practical situations.     

Technical Change in Banking: Evidence From Transition Countries

This paper investigates the effect of technical change on the costs of banking firms operating in 11 Central and Eastern European countries using Fourier‐flexible cost function specification for the period 1995–2002. A common cost frontier with country‐specific variables is employed in order to take into account macro‐economic and regulatory conditions that vary over country and time. Our findings suggest that the rate of reduction in costs resulting from technical change increased during the sample period. Banks operating in Hungary, Czech Republic and Poland benefited more from technical change than their counterparts. In terms of cost reduction, large banks benefited more from technical progress. This indicates that large banks are more able to change their optimal input mix in response to changes in technology.