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The Competitive Effects Of Advertising Essay

886 words - 4 pages

“The Competitive Effects of Advertising in the US
Automobile Industry, - Greuner, Kamerschen and Klein
“Organizational or Frictional Equilibria, X-Efficiency, and the
Rate of Innovation.” The Quarterly Journal of Economics Leibenstein
“X-Inefficiency Xists-Reply to an Xorcist” American Economic
Review Leibenstein

Introduction paper 1:
Is advertising anticompetitive? Some economists argue that advertising performs a useful social function by providing consumers with information about price, product quality, and availability, making markets more competitive and driving down profit rates.
Empirical evidence on the relationship between advertising and profitability is mixed. The ...view middle of the document...

This evidence supports the opinion that advertising serves primarily to transmit information, not to create entry barriers.
Conclusion paper 1:
We examined the effects of advertising on profitability in the US auto industry in the past three decades Our results support the view that advertising makes markets more competitive, not less competitive. We find no evidence that advertising operates as a barrier to entry. Our methods and data were carefully chosen to correct for problems that biased the results of previous studies. We use firm-specific data over a 25-year period to conduct separate time-series analyses on each of the three major firms in the industry. We are careful to deal with the potential endogeneity of advertising. The results are fairly robust to model specification and choice of performance variables On the whole, our findings strongly suggest that automobile advertising provides a social benefit.
Abstract paper 2:
This paper sketches a theory which is intended to serve as a basis for the concept of X-efficiency which the author developed elsewhere, and as a microeconomic basis for the study of various impediments and barriers to growth. A central notion is that firms do not produce on the outer bounds of their production possibility surface but well within it. Thus firms frequently produce less than maximum output with given inputs, and at various times they increase output without increasing outputs. The author has referred to the degree to which actual output is less than maximum output as the degree of X-inefficiency, and increases in output with the same inputs as increases in X-efficiency. Of major importance is the application of this concept to problems of technical change and growth. Thus the existence of X-inefficiency implies that firms do not always introduce technical changes when available and profitable. A frequent objection that has been raised to the X-efficiency concept is that...

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