Showing papers in "Journal of Industrial Economics in 1987"
TL;DR: The authors used a sample of all firms operating in 100 manufacturing industries to examine some aspects of firm dynamics and found that firm growth, the variability of firm growth and the probability that a firm will fail decrease with firm age.
Abstract: This study uses a sample of all firms operating in 100 manufacturing industries to examine some aspects of firm dynamics. It finds that firm growth, the variability of firm growth, and the probability that a firm will fail decrease with firm age. It also finds that firm growth decreases at a diminishing rate with firm size even after controlling for the exit of slow-growing firms from the sample. Gibrat's Law therefore fails, although the severity of the failure decreases with firm size. Copyright 1987 by Blackwell Publishing Ltd.
1,707 citations
TL;DR: In this article, the authors developed a general test for "monopoly" and derived testable restrictions on the firm's reduced-form revenue equation which must be satisfied by any profit-maximizing firm whose choices are not affected by either strategic interactions or the threat of entry.
Abstract: This paper develops a very general test for "monopoly." Using standard comparative statics analysis, the authors derive testable restrictions on the firm's reduced-form revenue equation which must be satisfied by any profit-maximizing firm whose choices are not affected by either strategic interactions or the threat of entry. For such an unfettered monopolist, the sum of the factor price elasticities of the reduced-form revenue equation must be nonpositive. The set of interesting alternative hypotheses is not empty. The authors develop simple models of oligopolistic, competitive, and monopolistically-competitive markets for which this test statistic may take on positive values. Copyright 1987 by Blackwell Publishing Ltd.
1,344 citations
TL;DR: This paper investigated the dynamics of firm growth in the US manufacturing sector during the recent past using a more comprehensive dataset and modern econometric techniques to correct for some of the problems in estimating such a relationship.
Abstract: Using panel data on the publicly traded firms in the US manufacturing sector in the recent past, I find that most of the change in employment at the firm level in any given year is permanent, that year-to-year growth rates are largely uncorrelated over time or with prior characteristics of the firm, and that there is almost no measurement error. Gibrat's Law is weakly rejected for the smaller firms in my sample and accepted for the larger firms. This finding remains when I control for the effect of selection (attrition) on estimates obtained from this sample. TBE PRESENT paper is a first step in an investigation of the dynamics of firm growth in the US manufacturing sector during the recent past.' It updates work by earlier researchers on the relationship between firm size and growth using a more comprehensive dataset and modern econometric techniques to attempt to correct for some of the problems in estimating such a relationship. The question addressed here is "Do small to medium-sized publicly traded manufacturing firms grow faster than large ones?" If they do, is it because of the way they are selected into our sample, or because of a difference in the rate and direction of innovative activity, or simply because the economy is finite and diminishing returns set in eventually? I do not claim to be able to distinguish clearly among all these alternatives, or even that only one must be true, but I do explore the implications of each for the data. Stochastic models of firm growth have been subjected to two kinds of empirical tests: the first posits a growth model that is stationary over time and then looks at the implications of this model for the equilibrium size distribution of firms. Various authors, beginning with Gibrat, have shown that the simplest version of a growth model, in which growth rates are
974 citations
TL;DR: A survey of 4,378 significant innovations shows that firms with fewer than 1,000 employees commercialized a much larger share than is indicated by their share of R and D expenditures.
Abstract: A survey of 4,378 significant innovations shows that firms with fewer than 1,000 employees commercialized a much larger share than is indicated by their share of R and D expenditures. Innovations per employee have been consistently above average in firms with more than 10,000 employees, and have become so in firms with fewer than 1,000. Intersectoral variation in the size distribution of innovating firms can be explained as a function of R and D-based technological opportunities, and of "technological ease of entry" by user firms with principal activities outside the sector. Copyright 1987 by Blackwell Publishing Ltd.
663 citations
TL;DR: In this article, the authors test the hypothesis that the price war in the American automobile market was a transitory change in industry conduct, using alternative equilibrium models of oligopoly under product differentiation, and show that a collusive solution is sustained in 1954 and in 1956, while a competitive solution holds in 1955.
Abstract: Movements in total quantity and in quality-adjusted price suggest a supply-side shock in the American automobile market in 1955. This paper tests the hypothesis that the shock was a transitory change in industry conduct, a price war. The key ingredients of the test are alternative equilibrium models of oligopoly under product differentiation. In nonnested (Cox) tests of hypotheses, a collusive solution is sustained in 1954 and in 1956, while a competitive solution holds in 1955. The result does not appear to be an artifact, since it is robust in tests against alternative specifications. Copyright 1987 by Blackwell Publishing Ltd.
584 citations
TL;DR: In this paper, the authors show that strategies designed to raise rivals' costs have a number of advantages over predatory pricing: they are credible, do not necessarily require the victim to exit, and do not require the existence of classical market power.
Abstract: advantage rivals by raising their costs. In this paper, we show that strategies designed to raise rivals' costs have a number of advantages over predatory pricing: They are credible, do not necessarily require the victim to exit, and do not necessarily require the existence of classical market power. The paper sets up a general model, proves a number of general results, and then applies the model to specific strategies involving "overbuying" inputs and vertical integration.
407 citations
TL;DR: In this article, the authors investigate the Schumpeterian hypothesis that large size is conducive to R&D investment and innovation and find that the effect of market concentration on research and development investment and on innovative performance is negligible.
Abstract: Using data from the Federal Trade Commission's Line of Business Program and survey measures of technological opportunity and appropriability conditions, this paper finds that overall firm size has a very small, statistically insignificant effect on business unit R & D intensity when either fixed industry effects or measured industry characteristics are taken into account. Business unit size has no effect on the R & D intensity of business units that perform R & D, but it affects the probability of conducting R & D. Business unit and firm size jointly explain less than one per cent of the variance in R D industry effects explain nearly half the variance. Two SETS of well-known hypotheses are associated with the later work of Joseph Schumpeter. The first concerns the effects of market concentration on research and development investment and on innovative performance. The second bears on the effects of firm size on R & D and innovation. In a recent paper (Levin, Cohen, and Mowery [1985]), we re-examined the first set of hypotheses. Simple regressions at the line of business level replicated the established findings that both R & D intensity and innovative performance first increase and then decrease as industrial concentration rises. The effect of concentration, however, was sharply attenuated when we controlled for interindustry differences in technological opportunity and in the appropriability of returns from new technology. Our results suggested that it is probably unwarranted to conclude that market concentration favors R & D investment and innovation. In this paper we investigate the Schumpeterian hypothesis that large size is conducive to R & D investment. This relationship has been studied at least as intensively as the link between concentration and R & D, but our approach is novel in two respects. First, using data collected by the Federal Trade
377 citations
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TL;DR: In this article, economic consequences of takeovers are investigated by analyzing profitability of enterprises acquired a s a direct or indirect ("white knight") consequence of tender offer s, and it is shown that the acquirers raised their targets' operat ing profitability, net of merger-related accounting adjustments.
Abstract: Economic consequences of takeovers are investigated by analyzing profitability of enterprises acquired a s a direct or indirect ("white knight") consequence of tender offer s. Target companies' pre-tender profitability averaged 0.97 percentag e points below peer industry norms. Nine years after takeover, acquir ed lines of business had operating income/assets percentages 3.10 poi nts below those of non-tender lines with similar industry bases, mark et shares, and merger accounting methods. Most of the targets' postta keover profit decline stemmed from asset value writeups. There is no indication that on average the acquirers raised their targets' operat ing profitability, net of merger-related accounting adjustments. Copyright 1987 by Blackwell Publishing Ltd.
275 citations
TL;DR: In this article, the authors compare the official Dutch R&D survey and the findings of his own survey among 3000 firms, and call into question the results from a number of empirical studies, bearing on subjects such as market structure and R & D, firm size and R& D or R &D and growth.
Abstract: The OECD surveys on R & D are considerably biased towards underestimating R & D in small firms. This conclusion is derived from the author's comparison between the official Dutch R & D survey and the findings of his own survey among 3000 firms. Although being based on Dutch observations only, the author's considerations have an impact on other OECD countries, since the official Dutch R & D survey is fully compatible with those in other countries. The findings call into question the results from a number of empirical studies, bearing on subjects such as market structure and R & D, firm size and R & D or R & D and growth.
265 citations
TL;DR: In this paper, the authors consider the extent to which the short-run dynamic behavior and long-run equilibrium levels of profitability differ among firms within the same industry, and they find that considerable heterogeneities exist within most industries.
Abstract: This paper considers the extent to which the short-run dynamic behavior and long-run equilibrium levels of profitability differ among firms within the same industry. Movements in profits are modeled in terms of firm specific deviations from average industry profits, and industry specific deviations from economy-wide average returns. Applied to a sample of 217 large U.K. firms, 1951-77, the results suggest that considerable heterogeneities exist within most industries. That is, most firms' profitability experience differs considerably from those of their closest rivals. Copyright 1987 by Blackwell Publishing Ltd.
242 citations
TL;DR: In this paper, the authors examined excess capacity barriers to entry and investment dynamics in a sample of thirty-eight chemical product industries and found that incumbents rarely built excess capacity pre-emptively in an effort to deter entry.
Abstract: This paper examines excess capacity barriers to entry and investment dynamics in a sample of thirty-eight chemical product industries. Logit and log-linear models of investment behavior are estimated, and specific case examples are considered. The results show that incumbents rarely built excess capacity pre-emptively in an effort to deter entry. In general, entrants and incumbents exhibited similar investment behavior.
TL;DR: In this article, the authors present arguments and econometric evidence in support of the hypothesis that, due to misspecification of the private R&D equation (i.e., failure to distinguish government sales from other sales), previous estimates of the effect of federal industrial R& D on private R & D funding are seriously upwardly biased.
Abstract: A number of previous studies have attempted to determine the effect of federal support of research and development (R& D) performed in industry on the rate of private investment in R&D, by estimating regressions of private R & D expenditure on federal industrial R & D expenditure, controlling for total demand (sales) and in some cases other variables. This paper presents arguments and econometric evidence in support of the hypothesis that, due to misspecification of the private R&D equation (i.e., failure to distinguish government sales from other sales), previous estimates of the effect of federal industrial R & D on private R & D funding are seriously upwardly biased.
TL;DR: In this article, the authors modeled the Vancouver retail gasoline market as a repeated game and estimated demand, cost, and intertemporal reaction functions from daily data on individual station prices, costs, and sales.
Abstract: Rivalry in the Vancouver retail gasoline market is modeled as a repeated game. Service-station demand, cost, and intertemporal reaction functions are estimated from daily data on individual station prices, costs, and sales. These functions are then used to calculate noncooperative and cooperative solutions to the constitutent game and the actual outcome of the repeated game. The actual outcome is found to be substantially less lucrative than the monopoly solution. Nevertheless, all stations are better off than if they played their noncooperative strategies in every period. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: In this paper, the authors examined federal auctions for leases on the Outer Continental Shelf in the light of the predictions of the first-price, sealed-bid, common-values model of auctions and found that the data strongly support the model for auctions in which one bidder is better informed than the other bidders.
Abstract: This paper examines federal auctions for leases on the Outer Continental Shelf in the light of the predictions of the first-price, sealed-bid, common-values model of auctions. The authors find that the data strongly support the model for auctions in which one bidder is better informed than the other bidders. The evidence for auctions in which bidders have noisy, but qualitatively similar, information is less conclusive but is consistent with a model in which each bidder does not know either the actual or potential number of bidders on a lease. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: In this article, a panel data study on the behavior of prices and margins of oligopolies involved in repeated games is presented, and the authors examine two supergame models which generate very different predictions about the cyclical behavior of price and margins.
Abstract: This paper is a panel data study on the behavior of prices and margins of oligopolies involved in repeated games. The authors examine two supergame models which generate very different predictions about the cyclical behavior of prices and margins. Evidence on the levels of price-cost margins indicates that oligopolies achieve equilibria that more closely resemble a one-shot Cournot-Nash outcome than monopoly. The authors find, however, that industries with "high" price-cost margins exhibit cyclical price behavior which is quite different from that of unconcentrated industries. Little evidence of price wars during either recessions or booms is found. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: In this article, the predictions of collusion-and efficiency-based static equilibrium explanations of interindustry profitability differences are formally developed and tested, using appropriate econometric techniques, with intraindustry data on seventy U.S. IRS minor manufacturing industries in 1963 and 1972.
Abstract: The predictions of collusion- and efficiency-based static equilibrium explanations of interindustry profitability differences are formally developed and tested, using appropriate econometric techniques, with intraindustry data on seventy U.S. Internal Revenue Service minor manufacturing industries in 1963 and 1972. None of the explanations has much explanatory power. The 1963 data are consistent with collusion-based models, while the 1972 data are inconsistent with all non-null hypotheses considered. Patterns of profitability are sharply different in the two years, in complex ways apparently unrelated to cyclical forces or the Phase II price controls. Implications of these results are discussed. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: In this paper, the authors examined technical change in the ethical pharmaceutical industry and used a Poisson specification to estimate a productivity relationship between research expenditures and drug discoveries, thus taking into account the integer nature of the data.
Abstract: This paper examines technical change in the ethical pharmaceutical industry. A Poisson specification is used to estimate a productivity relationship between research expenditures and drug discoveries, thus taking into account the integer nature of the data. The result s of estimations using panel data indicate that there is a positive c orrelation between a firm's research and development intensity and it s probability of discovering a new drug. Firm size, however, does not significantly affect the marginal productivity of research expenditu res. Finally, the estimates show that an increase in regulatory strin gency decreases the expected number of new drug discoveries. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: In this article, the revealed preference approach is used to construct a nonparametric test of the monopoly model and some simple generalizations of it, and the test is applied to data for the cigarette industry.
Abstract: The revealed preference approach is used to construct a nonparametric test of the monopoly model and some simple generalizations of it, and the test is applied to data for the cigarette industry. It exploits the maintained hypothesis that variations in the excise tax charged on a package of cigarettes allow us to assess seller reactions to common exogenous variations in marginal cost. Results indicate that the monopoly hypothesis, and other simple models that do not embody at least a moderate amount of competition, serve as poor predictors of the effects of excise-tax changes on cigarette prices, sales, and revenues. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: In this article, the authors examine how uncertainty in future operating costs at the time of undertaking long-lived and irreversible capital investment projects may provide an incentive for multinational production, even if firms are risk-neutral, as long as they face a downwardsloping demand curve.
Abstract: This paper examines how uncertainty in future operating costs at the time of undertaking long-lived and irreversible capital investment projects may provide an incentive for multinational production. This incentive may be present even if firms are risk-neutral, as long as they face a downward-sloping demand curve. The lower the international correlation between marginal cost shocks and the lower the elasticity of demand, the greater the benefit to establishing plants in different countries. However, even if cost fluctuations are perfectly correlated internationally, there may still be gains from multinational production.
TL;DR: In this paper, the authors investigated the wealth impact on aircraft manufacturers of crashes involving their aircraft and found that on average the manufacturer suffers a wealth loss of $21.3 million as the result of a fatal crash in which the structural integrity of the aircraft is at issue.
Abstract: This paper investigates the wealth impact on aircraft manufacturers of crashes involving their aircraft. The author attempts to separate out the regulatory, tort law, and endogenous market components of these costs using stock market data. The results indicate that on average the manufacturer suffers a wealth loss of $21.3 million as the result of a fatal crash in which the structural integrity of the aircraft is at issue. The analysis suggests that not all of this amount can be attributed to regulatory or tort law mechanisms, and that market forces play a role in providing air travel safety. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: The R&D diversification in manufacturing of large US firms is found to be purposive, exploiting complementarities of various research activities and forming groups of related industry categories as discussed by the authors.
Abstract: The R & D diversification in manufacturing of large US firms is found to be purposive, exploiting complementarities of various research activities and forming groups of related industry categories. Purposively diversified firms are seen to behave differently than randomly diversified or undiversified firms. Further, the behavioral differences between purposively diversified firms and others result because the former allocate relatively more R & D funds to industry categories where appropriability conditions are good and relatively fewer funds to those categories where appropriation of the returns from R&D is difficult. Finally, R&D expenditure and productivity are more closely linked at the group level than at the industry-category level, suggesting knowledge spills across industry categories are important.
TL;DR: In this paper, the authors show that such inefficient equilibria are a theoretical possibility and that deregulation of opening hours would lead to low er costs and prices, and that this case does not arise in practice and that, given the constraint that individual shop s may not vary their price by time of day, competitive pressures would induce excessive opening at times when high costs would be incurred, such as on Sundays.
Abstract: Restriction of shop opening hours is current, but controversial, pr actice in Britain and much of Europe. The economic case presented for such restrictions is that, given the constraint that individual shop s may not vary their price by time of day, competitive pressures woul d induce excessive opening at times when high costs would be incurred , such as on Sundays. The authors show that such inefficient equilib ria are a theoretical possibility. Empirical evidence on retail costs and demand in the United Kingdom shows that this case does not arise in practice and that deregulation of opening hours would lead to low er costs and prices. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: In this article, a model of nonprofit firm behavior which links nonprofit market structure, firm-specific characteristics and firm performance was developed, in order to generate measures of intramarket competition for donations in one specific philanthropic "industry"-the medical research charity industry.
Abstract: This paper develops a model of nonprofit firm behavior which links nonprofit market structure, firm-specific characteristics and firm performance. A method for defining nonprofit industries is proposed in order to generate measures of intramarket competition for donations in one specific philanthropic "industry"-the medical research charity industry. These measures and other data are subsequently used to estimate structure-performance relationships implied by the behavioral model. Analysis of administrative, fundraising and research allocations shows that market structure is indeed important in determining the behavior of charities. Increases in market concentration lead to reduced funding for research projects and greater discretionary expenditures.
TL;DR: In this paper, a model of the shareholder constraint is described in terms of the relationship between shareholding concentration and corporate control, and a unified perspective (including takeovers as a special case) is developed whereby leading coalitions are costly to form and possess power in a shareholder-voting game.
Abstract: A model of the shareholder constraint is described in terms of the relationship between shareholding concentration and corporate control. A unified perspective (including takeovers as a special case) is developed whereby leading coalitions are costly to form and possess power in a shareholder-voting game. Control is defined in terms of power indices for simple games. A static theory of the firm is developed in terms of the optimal formation of controlling coalitions. A dynamic theory of an owner-controlled firm is described which explains increasing shareholding dispersion accompanying growth. I. INTRODUCTION CAPITAL MARKET constraints on managerial discretion are usually described in terms of two mechanisms: (i) the ability of large shareholders to organise their voting power to enforce wealth maximisation; and (ii) the threat of takeover following a fall in the share price. Most writers have tended to emphasise the takeover mechanism on the assumption that the capacity of shareholders to organise voting coalitions is weak. However, as Aoki [1983] has recently argued, the trend towards greater shareholding concentration with the growing importance of institutional shareholders gives a greater role to the first mechanism. Large shareholders cannot easily sell their holdings without adversely affecting the share price and therefore become "locked-in" to dealing directly with management.' Despite its central role, the treatment of share concentration has usually been ad hoc. Most writers have taken low concentration as implying a loose constraint (or management control), by making it difficult for shareholders to organise. By contrast a tight constraint (ownership control) prevails where there is at least a sizeable minority holding. However, little attention has been * This paper and Leech [1987] are based on Warwick Economic Research Paper No. 262 'Ownership Concentration and the Theory of the Firm: A Simple-Game-Theoretic Approach Applied to US Corporations in the 1930s', July 1985. I wish to thank Peter Law for helpful discussions of the ideas contained in them. I am also grateful for comments to John Cable, Keith Cowling, Paul Geroski, Donald Hay, two anonymous referees and participants in a staff seminar at Warwick University. ' Aoki concludes that "...the tendency toward a managerial revolution in the sense of wider dispersal of shareholders' control is now definitely reversed". He suggests that the takeover mechanism is losing its role in disciplining management which fails to maximise share values; "... rather it is becoming a means for large acquisition-minded corporations to take over well-managed small and medium firms".
TL;DR: In this paper, the authors used data on twenty-two chemical products to test alternative models of capacity expansion, including the Manne model and a "scale frontier" model, and the empiri-cal results strongly support the scale frontier model: the size of n ew plants increased along a time trend that was unrelated to market center, market growth, or the magnitude of investment scale eco nomies.
Abstract: What factors determine the size of new industrial plants? This study uses data on twenty-tw o chemical products to test alternative models of capacity expansion, including the Manne model and a "scale frontier" model. The empiri -cal results strongly support the scale frontier model: the size of n ew plants increased along a time trend that was unrelated to market c oncentration, market growth, or the magnitude of investment scale eco nomies. Entrants typically built smaller plants than incumbents, but all firms built plants closer to the technological frontier when smal l plants carried a higher relative cost penalty. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: In this article, the authors compare the Nash and Stackelberg equilibria in a differentiated-products model under price and for quantity strategy s paces, and show that it is always more profitable to be a quantity (price) sett er if the goods are substitutes (complements).
Abstract: Comparing the Nash and Stackelberg equilibria in a differentiated-products model under price and for quantity strategy s paces, it is shown that, whatever the role (leader, follower, Nash co mpetitor), it is always more profitable to be a quantity (price) sett er if the goods are substitutes (complements). However, for the consu mer, price competition is always the best. Concerning total surpluses , the ranking is first the Bertrand equilibrium, then the price Stack elberg, followed by the mixed Nash, the quantity Stackelberg, and the Cournot equilibria for both the complement and substitute cases. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: In this article, the authors consider a market for a differentiated product where the possibility to price discriminate by the selective use of labels is due to the fact that buyers differ in the intensity of their preferences and that, before they buy, they are unable to distinguish among the different brands without the aid of identifying labels.
Abstract: This paper explains the fact that firms market both labeled and unlabeled products as a practice of price discrimination that emerges as a non-cooperative equilibrium outcome. The authors consider a market for a differentiated product where the possibility to price discriminate by the selective use of labels is due to the fact that buyers differ in the intensity of their preferences and that, before they buy, they are unable to distinguish among the different brands without the aid of identifying labels. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: A special issue of the Journal of Industrial Economics devoted to the recent burst of empirical work in industrial organization is presented in this paper, emphasizing the ways in which recent work builds upon and departs from earlier traditions.
Abstract: This brief essay introduces a special issue of the Journal of Industrial Economics devoted to the recent burst of empirical work in industrial organization. Trends in empirical research in this field are discussed, emphasizing the ways in which recent work builds upon and departs from earlier traditions. The papers in this special issue, which exemplify these developments, are briefly discussed. Copyright 1987 by Blackwell Publishing Ltd.
TL;DR: In this article, it is shown that rational conjectures and reasonable conjectures are not suitable for understanding competition among optimizing firms and that their operation depends crucially on an invisible, nonoptimizing "deus ex machina".
Abstract: The concepts of 'rational conjectures' and 'reasonable conjectures' are critically reviewed. It is shown that their operation depends crucially on an invisible, non-optimizing 'deus ex machina'. Hence, these concepts are not really suitable for understanding competition among optimizing firms. In addition, the widely claimed "fact" that Bertrand conjectures are locally rational conjectural variations is shown to be erroneous. THE MESSAGE of this paper should be plain from the title. It reflects a disillusionment with the concepts of 'rational conjectures' and 'reasonable conjectures', for helping us understand economic interactions under imperfect competition. On the face of it, these concepts seem to offer the economic modeller some useful tools. Hence this paper is in some sense intended as a friendly warning to other economic modellers. There are inherent conceptual weaknesses in these concepts, that do not become apparent until one begins to penetrate their inner logic. To make plain the weaknesses of 'rational conjectures' and 'reasonable conjectures', we shall concentrate on the simplest application of the ideas-to duopoly. And, we shall illustrate our points using the classical Cournot example of duopolists facing a common linear demand curve and having the same, constant marginal cost. The reader may know that this example figures prominently in the rational conjectures literature, it being "shown" that Bertrand conjectures are locally rational conjectural variations. We shall see in section VI that this claim is not really valid, although widely asserted. But our real message is on a different plane, and pertains to the usefulness of the concepts in general.
TL;DR: In this article, the effect of market advertising intensity on firm demand elasticities was investigated in seventeen metropolitan areas across the U.S. The results obtained for all three routine legal services examined are consistent with the hypothesis that advertising increas es competition among sellers in a market.
Abstract: This study's findings, together with the results of earlier studies of the relationship between advertis ing and market prices, provide considerable empirical support for the pro-competitive view of seller advertising. Data on attorney fees an d advertising practices in seventeen metropolitan areas across the U. S. were used to estimate the effect of market advertising intensity o n firm demand elasticities, holding other possible influencing factor s constant. The results obtained for all three routine legal services examined are consistent with the hypothesis that advertising increas es competition among sellers in a market. Copyright 1987 by Blackwell Publishing Ltd.