Review of Industrial Organization
13: 495–508, 1998.
1998 Kluwer Academic Publishers. Printed in the Netherlands.
Market Share Dispersion Among Leading Firms as a
Determinant of Advertising Intensity
MICHAEL S. WILLIS
The Swedish Institute of Health Economics, Lund, Sweden, and Department of Economics,
University of California at Santa Barbara, Santa Barbara, CA, U.S.A.
RICHARD T. ROGERS
Department of Resource Economics, University of Massachusetts at Amherst, Amherst, MA
Abstract. Previous advertising intensity modelshave failedtoaddress adequately the rivalry effects of
leading ﬁrms trying to protect and enhance the market shares of their brands. We argue that the relative
degree of market share parity among leading ﬁrms in oligopolies is a crucial determinant of market
advertising levels. This study presents a model that more thoroughly characterizes market structure
by including the variance in the market shares of the top four ﬁrms along with the concentration
ratio. This model is then tested using a unique 1987 data set of 58 well-deﬁned U.S. food and
tobacco manufacturing markets that used private data vendors for branded product market shares and
media advertising aimed at household consumers. We ﬁnd that industry advertising-to-sales ratios are
highest in those industries with the highest price-cost margins, highest concentration, and those with
equally-sized leading ﬁrms. Oligopolists seem unable to control advertising expenses as concentration
increases and they likely overinvest in advertising rivalry when they have similar market shares.
Key words: Advertising intensity, market structure, market share equality.
While Industrial Organization economists have appreciated the importance of non-
price rivalry since the 1950s, the empirical literature regarding the relationship
between advertising intensity and market concentration is not overwhelmingly
convincing. Although much of the empirical work ﬁnds a positive relationship
between industry advertising intensity and concentration, the relationship often
shows the maximum effect coming from low-grade oligopolies – those with four-
ﬁrm concentration ratios under 50.
Dorfman and Steiner (1954), ﬁrst linked the advertising-to-sales ratio (A/S)
with market structure. They demonstrated that under simple neoclassical assump-
tions, a monopoly’s optimal advertising-to-sales ratio must equal the ratio of its
advertising elasticity of demand to the price elasticity of demand for its product.
The subsequent elaboration of this model to cover oligopolistic competitors (e.g.,
The authors thank Drs. Julie A. Caswell and Cleve E. Willis for helpful comments, as well as
those of the Editor, Dr. William G. Shepherd.