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Advertising, Price Competition, and Entry in Concentrated Industries

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Principal Investigator/Project Leader: 
Co-Principal Investigator/Co-Project Leader: 
Department of Project: 
Department of Resource Economics
Project Description: 

The food industry is being transformed by two important changes. It has recently been characterized by rising concentration, partly due to a number of large mergers since the beginning of the new millennium.[1] In addition, the advent of the internet is affecting the source of advertising and the method of purchase for many food products. Firms in the industry must devise strategies to adapt to and capitalize on these changes that have the potential to affect market structure and performance. We propose research on the food industry with two related components that examine the effect of firms' strategies in pricing and advertising on market concentration and market performance.  The first component ("Concentration and Fragmentation in the Age of Digital Advertising") examines the effect of digital advertising on market concentration using beer sales data, which provides the advantage of observing two similar, but distinct markets - light and regular beers. The second component ("Market Reactions to Potential Entry") investigates the role of price variation in defending against market entry. For this component we use data on steak sauce sales. These data are particularly advantageous for this study because of the limited number of brands and the infrequent nature of consumer purchases in this market. 

Concentration and Fragmentation in the Age of Digital Advertising
Firms' advertising strategies in shaping the concentration of markets have played an important role in industry studies, especially those related to consumer packaged goods (CPG). When consumers are sufficiently responsive to advertising and traditional mass-media outlets (e.g. national TV ads) are dominant, industries can be characterized by large advertising outlays and a persistent concentration in large markets (Sutton, 1991). But digital advertising may be disrupting this structure in some industries. As online platforms become more effective alternatives for reaching consumers, firms in certain markets are no longer required to incur large expenses in traditional advertising in order to enter the market (and survive). For the first time in history, digital advertising spending in 2017 surpassed advertising expenses in traditional outlets (TV, radio, print media, and outdoor; Zenith, 2018). Given this shock to the advertising industry, it is important to reconsider the relationship between advertising and concentration. We focus on consumer packaged goods sold through brick and mortar stores, the Concentration and Fragmentation in the Age of Digital Advertising Firms' advertising strategies in shaping the concentration of markets have played an important role in industry studies, especially those related to consumer packaged goods (CPG). When consumers are sufficiently responsive to advertising and traditional mass-media outlets (e.g. national TV ads) are dominant, industries can be characterized by large advertising outlays and a persistent concentration in large markets (Sutton, 1991). But digital advertising may be disrupting this structure in some industries. As online platforms become more effective alternatives for reaching consumers, firms in certain markets are no longer required to incur large expenses in traditional advertising in order to enter the market (and survive).  For the first time in history, digital advertising spending in 2017 surpassed advertising expenses in traditional outlets (TV, radio, print media, and outdoor; Zenith, 2018). Given this shock to the advertising industry, it is important to reconsider the relationship between advertising and concentration. We focus on consumer packaged goods sold through brick and mortar stores, the majority of which are foods and beverages. The United States beer industry represents an ideal case study to empirically test the role of consumer preferences in driving market structure. Despite having a similar market size,[2] regular beer displays a much more fragmented structure and larger entry rates than light beers. In 2015, the numbers of brands in regular and light beer categories were 2,055 and 112, respectively. During 2006-2015, an annual average of 226 brands entered the regular segment and 102 brands exited, while only 9 brands entered (and exited) the light segment.[3] Further, concentration in the light segment has remained persistent over
the last decade, while concentration has been eroding in the regular segment.[4] This has been accompanied by a considerable reduction in traditional advertising outlays in the regular segment, but not in light beer. Using detailed scanner data spanning over a decade and dozens of metropolitan areas, we propose to carry out estimations of demand in various CPG industries that appear to be affected by the recent shift in advertising towards digital. We empirically test and quantify the impact of differential consumer responsiveness (elasticity) to traditional advertising across the two types of industries (high-internet sensitive vs. low internet sensitive) in which United States beer industry (with its regular and light segments) represents an example.