ADVERTISING, COMPETITION AND MARKET SHARE INSTABILITY

Advertising can promote market power by differentiating products, by e stablishing brand loyalty among consumers, and by raising the costs of entry. On the other hand, advertising can be a source of valuable inf ormation to consumers that leads to an erosion in the market shares of individual sellers. The empirical relationship between advertising an d market share instability across industries sheds light on the compet itive implications of advertising and promotional activities. Prior te sts of this relationship rely on market share observations from the Ce nsus of Manufactures that are reported only every five years. The pres ent study, by contrast, employs a data set consisting of annual market share observations for 163 four-digit manufacturing industries over t he period 1978-88. The empirical results show a positive and statistic ally significant ceteris paribus relationship between advertising inte nsity and market share instability, thereby lending support to the hyp othesis that advertising is generally pro-competitive.