ADVERTISING, COMPETITION AND MARKET SHARE INSTABILITY

Advertising can promote market power by differentiating products, by establishing brand loyalty among consumers, and by raising the costs of entry. On the other hand, advertising can be a source of valuable information to consumers that leads to an erosion in the market shares of individual sellers. The empirical relationship between advertising and market share instability across industries sheds light on the competitive implications of advertising and promotional activities. Prior tests of this relationship rely on market share observations from the Census of Manufactures that are reported only every five years. The present study, by contrast, employs a data set consisting of annual market share observations for 163 four-digit manufacturing industries over the period 1978-88. The empirical results show a positive and statistically significant ceteris paribus relationship between advertising intensity and market share instability, thereby lending support to the hypothesis that advertising is generally pro-competitive.