Market concentration and persuasive advertising: a theoretical approach

This paper examines the structural relation between persuasive advertising intensity and market concentration. The interaction of advertising costs with the consumer’s willingness to pay shapes the way markets respond to changes in sunk cost structures. This adjustment may involve firm entry and exit or modifications in advertising levels. It is shown that a non-monotonic association between advertising intensity and concentration may emerge even in the absence of collusion, requiring as a necessary condition that the ratio of operational profits and advertising cost elasticities with respect to a measure of perceived quality be decreasing. This result is robust to changes in both exogenous and endogenous sunk cost parameters. A simple tool is also proposed to empirically assess the behavior of the elasticities ratio. Finally, the model describes how intertemporal general equilibrium mechanisms may skew or even reverse the advertising-concentration relation through scale effects.