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This dissertation addresses issues of oligopoly markets where advertising plays a prominent role. The first study empirically investigates the effect of advertising regulations on equilibrium consumption of an addictive commodity using U.S. cigarette industry data. The results of the first study show that the advertising regulations reduced cigarette consumption by increasing the industry’s market power. In addition we find that a representative smoker is relatively impatient, an expected outcome for a commodity like cigarettes, where physical dependence, procrastination, and cognitive dissonance would lead to a high rate of time preference. In the second study, by using the same data set, we look at the effect of advertising regulations on the supply side of firm’s cost minimization behavior. Economic theory provides two alternative hypotheses, which are investigated empirically. According to the LeChatelier principle, regulations that limit substitution possibilities among inputs will reduce efficiency. Alternatively, a prisoner’s dilemma game in advertising suggests that advertising regulations may have a coordination effect which leads to higher efficiency. We use Data Envelopment Analysis to determine which effect is dominant. The results show that the Broadcast Advertising Ban in 1971 improved the industry’s cost efficiency, implying that the coordination effect dominates the LeChaterlier effect. The third study addresses the effect of advertising on the market structure and performance using U.S. brewing industry data. The results indicate that an increase in the minimum efficient scale and a high advertising intensity are primal causes of rising concentration in the U.S. brewing industry. This finding is consistent with Sutton’s (1992) prediction. We also find empirical evidence of market power at very high levels of concentration. |
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