COMPETITION AND THE CIGARETTE TV ADVERTISING BAN E. WOODROW ECKARD, JR.*
The 1970 ban on telmision advertising for cigarettes constitutes a quasi-experiment allowing the efect of advertising on competition to be evaluated. Assuming the ban reduced the eflcacy of industry advertising, an analysis of various proxies for competition before and after the ban enables one to deduce whether advertising promotes or limits competition among cigarettefirms. The results indicate that in this case the restriction of advertising reduced competition.
1.
INTRODUCTION
Whether advertising increases or decreases competition has been debated for decades. On one hand, Kaldor [1949-501, Bain [1956], and others argue that advertising reduces competition by enabling the leading firms in an industry to increase product differentiation. This lowers the existing elasticity of demand for the firm’s output and erects barriers to the entry of new firms into the industry. On the other hand, Telser [1964], Nelson [1975], and others argue that advertising increases competition by disseminating information about the price and other product attributes more widely among consumers. This increases the demand elasticities facing the existing firms and facilitates the entry of new firms. The results of empirical studies of these alternative theories conflict, and so the debate c0ntinues.l Empirical studies generally focus on large cross-sectional industry samples and compare various measures of competition (e.g. profits, industrial concentration, or mar-
ket share stability) between high-advertising consumer-goods industries and lowadvertising producer-goods industries. The principal drawback of this approach is that one must control for the many differences among industries in addition to advertising which might affect the proxies for competition. The present paper takes a different approach to test the same hypotheses. The 1970 ban of cigarette advertising on television can be viewed as a quasi-experiment. I assume that it substantially reduced the efficacy of cigarette advertising, whatever its effects on competition, and test for these effects by comparing industry performance measures before and after the ban. The results, on balance, indicate that the ban reduced competition in the cigarette industry. II. BACKGROUND
In 1970, federal legislation was passed banning the advertising of cigarettes on television and radio, effective 2 January 1971. The ban was the result of increasing evidence assumulated during the previous two decades regarding the adverse effects of smoking on health and was not related to considerations of industry competition. Prior to the ban, the cigarette industry was a heavy user of television advertising (see Table I). From 1963 to 1970, the industry’s television (plus radio) advertising-to-sales
* Associate Professor, Graduate School of Business Administration, University of Colorado at Denver. I have received helpful comments from Rich Foster, Sue Keaveney, and two anonymousreferees. Remaining errors are my own. I would also like to thank the Graduate School of Business Administration, University of Colorado at Denver, for financial support, 1. See Scherer [1980], Comanor and Wilson [1979], and Eckard [1987; 19881 for reviews of these studies. 119 Economic Inquiry I Y Vol. XXR, J ~ U ~ 1991,119-133
@WesternEconomic Association International
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ECONOMIC INQUIRY
TABLE I Cigarette Industry Advertising: 1963-80 (Millions of 1982$) Advertising Expendituresa TV & Radio Total 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
$565.7 594.8 592.9 655.1 680.8 632.6 590.2 517.6 5.0 0 0 0 0 0 0
0 0 0
$770.1 794.2 778.1 850.0 867.7 824.1 768.6 749.3 566.7 554.0 500.0 568.1 720.7 881.2 1033.5 1054.3 1199.2 1261.1
Advertising-to-Sales Ratiob Total TV & Radio 6.9% 7.4 7.4 8.0 8.0 7.6 7.4 6.2 0 0 0 0 0
0 0 0 0 0
9.4% 9.9 9.7 10.4 10.2 9.9 9.7 9.0 7.0 6.9 5.9 6.7 7.9 9.2 10.9 10.8 12.2 11.9
aAdvertising data are from Federal Trade Commission (1986, Tables 6, 6A and 7). No data are available prior to 1963. The form in which the ETC collected cigarette industry advertising data changed in 1975, and therefore reported data for 1975 and later years are not exactly comparable to pre-1975 data. However, 1970 data are reported for both the new and old collection methods, allowing the two series to be linked. 'Industry sales are value of production data for SIC a111 (Cigarettes) from various Annual Census of Manufactures publications.
ratio averaged 7.4 percent.2 The industry's total advertising-to-sales ratio during this period averaged 9.8 percent, which was among the highest of all i n d u s t r i e ~Tele.~ vision advertisements accounted for 76 percent of this total. In effect, the ban forced the industry to drop its principal advertising medium virtually overnight.
2. Radio advertising was relatively minor, less than 8 percent of television advertising. Henceforth my references to television advertising imply television plus radio advertising. 3. The mean advertising-to-sales ratio for a sample of 228 SIC four-digit industries in 1967 was 1.76 percent (Eckard [1987],Table I). In that year, only seven of these industries had ratios higher than 9.8 percent.
Of course, the industry could and did substitute advertising in other media for the lost television advertising. However, during the first five years after the ban, increased spending in other media did not offset the elimination of television advertising expenditures. Consequently, the mean total advertising-to-sales ratio fell to 6.7 percent during 1971-75.4 These advertising substitutes were qualitatively inferior, exacerbating the impact of the spending reductions on efficacy. Advertising intensity did not approach pre-ban levels 4. The difference between mean advertising-tosales ratios for 1963-70 and 1971-75 is statistically significant at the 1 percent level.
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four of the six major tobacco firms. They find abnormally high, statistically significant, positive returns and attribute this in part to the expectation of reduced competition caused by the ban. Second, Holak and Reddy [1986,219] study the ban "...to extrapolate managerial implications" of such public policy actions. Using time series regression analysis, they estimate, inter alia, the ban's impact on a brand loyalty proxy and the price elasticity of demand for a sample of ten major cigarette brands during 1950-79. The implications of their results are mixed. On one hand, they find higher brand loyalty after the ban, a result consistent with the competitive view of advertising. On the other hand, they find higher price elasticities after the ban, which is consistent with the monopoly view. 111. PREVIOUS WORK Other studies of the advertising ban Two previous studies provide some ev- focus on its effectiveness (or lack thereof) idence on the competitive impact of the in achieving stated public policy goals, cigarette advertising ban. First, Mitchell such as reducing overall cigarette conand Mulherin [1988] test the hypothesis, sumption.8 They present no evidence on developed from the economic theory of its competitive impact. Calfee [1985] finds regulation, that the ban benefited cigarette that federal restrictions on cigarette adverfirms.7Using standard stock market event tising content prior to the ban reduced analysis, they examine monthly returns competition among firms in supplying during a thirty-month window ending in safer cigarettes. However, he does not adDecember 1970 for a portfolio containing dress the broader competitive questions raised by advertising and discusses the ban only in passing. 5. The difference between mean advertising-tosales ratios for 1963-70 and 1976-80 is statistically sigThe general level of competition in the nificant at the 1 percent level. cigarette industry is analyzed in recent pa6. Schneider et al. [1981]suggest that advertising pers by Sullivan [1985] and Ashenfelter intensity increased in the late 1970s because of the introduction of new low-tar brands. Indeed, new brand and Sullivan [1987]. Both papers examine entry also increased in the late 1970s (see below).There the 1955-82 period and find that the actual appear to be no regulatory changes that would explain responses of industry prices, sales, and the increase in advertising. Also, the ETC advertising data indicate that the increase was not concentrated revenues to cigarette excise tax changes in one particular medium, suggesting that the increase are inconsistent with the predictions of the was not caused by a particular technological innovation. monopoly or perfect cartel model. Neither 7. The cigarette firms apparently favored the ban. paper considers the possible effects of adDoran [1979,95]reports that the Tobacco Institute Exvertising, including the television adverecutive Committee, representing the industry, offered to voluntarily end television advertising by September tising ban, on industry competition. In an
again until 1976. During 1976-80, the advertising-to-sales ratio averaged 11.0 percent, higher than the mean for the pre-ban years 1963-70.5 Because the substitutes were inferior to television advertisements, the increased advertising expenditure per dollar of sales does not mean that the market impact of advertising was necessarily greater than for the pre-ban period.6 It should also be noted that the ban did not cause a decline in industry sales. If it had, this might have generated its own confounding effects on the performance measures analyzed below. Total cigarette sales rose from about 470 billion units in 1960 to about 533 billion units in 1970 and about 620 billion units in 1980, a 32 percent increase over 1960.
1970,conditional upon a grant of antitrust immunity. The industry was also concerned about the possible adverse impact on sales of anti-smoking messages aired between 1968 and 1970 under the Fairness Doctrine. These messages would (and did) discontinue after the cessation of cigarette television ads.
8. These include Hamilton (19721,Doran [1979], Warner [1979],and Schneider et a1 [1981].
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earlier paper, Telser [1962] analyzes the effects of cigarette advertising on firm and industry demand. He concludes that advertising was perhaps the principal means of competition among cigarette firms prior to World War 11, but that its importance declined during the post-war period (i.e., 1946 to 1959) as product innovation became more important, and as price competition increased after the successful 1946 antitrust case against the major tobacco firms. Schmalensee [1972] also examines the impact of cigarette advertising on demand, in part extending and updating Telser's work and correcting alleged deficiencies therein. Schmalensee's statistical results, as he acknowledges, are weak because of various econometric and data problems. He nevertheless tentatively concludes that "advertising seems unlikely to be a very powerful force in the cigarette industry" [1972, 2151. He does not comment specifically on its competitive impacts. IV.
METHODOLOGY
The premise of this paper is that the ban on television advertising substantially reduced the efficacy of industry advertising, whether its effects be pro- or anti-competitive. I assume firms sell differentiated products (cigarette brands) and that each confronts a downward-sloping demand curve. These firms compete to attract customers away from the others, as well as to retain their old customers and attract new smokers. Reduced (increased) competition among firms means less (more) elastic demand for the individual firm's product and lower (higher) cross-elasticities of demand among firms. The anti-competitive theory holds that advertising's principal effect is to differentiate products and to create and reinforce brand loyalties, thereby reducing brand switching. Brand and firm demand is made less elastic, and cross-elasticities of demand among brands and firms are reduced by advertising. In contrast, the pro-
competitive theory assumes that the principal effect is to increase the information available to consumers regarding the positive attributes of alternative brands, including new brands, thereby increasing brand switching. Brand and firm demand is thus made more elastic, and cross-elasticities of demand among brands and firms are greater than in a world with no advertising. Individual firms, to be sure, advertise to differentiate their brands and increase their sales and profits. However, the simultaneous efforts of these firms to each increase its own market power via advertising results in reduced market power for all, compared to a world with no advertising. The two competing theories of advertising's impact on competition allow the formation of testable hypotheses using specific measures of industry competition. I select share stability, market-share and industry-concentration levels and trends, profitability, and entry. These have often been used as proxies for competition in studies of advertising and competition, and they can be computed from available data. The use of multiple proxies eliminates the problem of selecting and relying on a single "best" proxy, and, if a consistent pattern emerges across the different measures, allows for more robust results. I compare the competition proxies for ten years before 1970 (1960-69) and ten years after 1970 (1971-80). The year 1970 is excluded because the drop in expenditures on television advertisements by the cigarette industry in that year (see Table I) might have been related to the passage of the ban. These periods are sufficiently long to provide good estimates of the stability and trend measures. The early period begins late enough (1960) that the competitive impacts (positive or negative) of television's introduction during the 1950s should be fully manifest in the performance measures for that period. Predications about market-share stability can be derived from each theory's im-
ECKARD CIGARETTE ADVERTISING BAN
plications regarding the elasticity of demand facing the firm and cross-elasticities among firms.9 The market power theory implies that, with television advertising, firm demand is relatively inelastic and cross-elasticities are low. This means that firm share is relatively unresponsive to the market behavior (e.g., price changes) of other firms; i.e., firm share is relatively stable. In contrast, the competitive theory predicts relatively elastic firm demand and higher cross-elasticities, implying less stable shares. With television advertising, more information is available to each consumer about brands not currently consumed. This reduces the ex ante search costs of experimenting with new brands and therefore increases the likelihood of switching. I use two measures of share stability. The first is the standard deviation of annual market shares for each period. The second is the standard error about a linear market-share time trend (i.e., share regressed on time) during each period. For example, low variation about a trend induced by other factors might be consistent with the market power theory, but would be obscured by the impact of the trend on the standard deviation. Share stability measures are computed at both the firm and brand levels.'O Market-share and industry-concentration level and trend predictions can be derived from the market power theory because it argues that advertising-induced brand loyalty and barriers to entry give a relative advantage to established leading 9. See Eckard [1987]for a more thorou h discussion of the relevant theory and a review o!previous advertising/competition studies using both firm and brand market-share stability measures as proxies for competition. This approach is generally aiributed to Telser [1964]. 10. C a l k [1985]notes that cigarette "health scare" advertising during the 1950s increased brand switching. However, he argues that this effect ceased before 1960 as regulations prevented firms from making health-related claims and counterclaims.Accordingly, regulatory changes did not have major exogenous impacts on share stability measures during the 1960s.
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firms. Such problems are exacerbated if scale economies in advertising exist. This implies high equilibrium market shares for leading firms (i.e., high industry concentration) relative to those which would exist in a more competitive state, as in Mueller and Hamm [1974].If the television ban reduces this advantage (i.e., reduces market power), then declining shares for leading firms (i.e., declining concentration) would be expected after the ban as the industry adjusts to a new equilibrium characterized by lower leading-firm shares." In contrast, the competitive theory generates conflicting predictions here. On one hand, simply reversing the market power argument implies increasing large-firm shares and declining small-firm shares after the advertising ban, as in Lynk [1981].On the other hand, if there are scale economies in advertising, or if advertising promotes economies of scale or scope in manufacturing by expanding the markets of efficient leading firms, as argued by Benham [1972],then predictions regarding the ban's effect on leading-firm shares would be the same as under the market power view. My individual brand and firm marketshare trend measure is the coefficient of the independent time variable in a regression of market share on time. I measure market concentration at both the brand and firm level using the HirfindahlHirschman Index (HHZ), defined as the sum of the squared market shares of all firms or brands in the market. Concentration trends are determined by the simple linear regression of HHI on time. 11. Conflicting evidence on this general point exists. Lynk [1981]argues that the introduction of television advertising reduced concentration and presents evidence that this impact persisted into the early 1960s. In contrast, Mueller and Rogers [1980;19841 argue that the impact was positive and persisted into the late 1970s.Each of these studies uses conventional concentration ratios and examines relatively lar e (albeit different) samples of industries. See Eckard 719881 for evidence that rising industry concentration may be a poor proxy for alleged adverse consumer welfare impacts of advertising.
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ECONOMIC INQUIRY
My first measure of entry is simply a The third basic performance measure is count of the new brands in each period. profitability. The market power view, as argued by Comanor and Wilson [1967], The second measure is the market share of new brands three years after their intromaintains that advertising generates induction, an attempt to account for entry creased industry profits. Lower profits are success. Counting a large (small) number expected after the ban, as advertising-genof entrants may be misleading if their sucerated monopoly rents are reduced or eliminated by the consequent rise in com- cess rate is low (high). In addition, the market power theory implies that adverpetition. If, instead, advertising promotes tising provides large firms with an advancompetition, higher profits are expected tage in introducing new brands. This is after the ban as interfirm rivalry is reduced. One might also argue that if adver- tested by comparing the relationship between firm size and brand entry before tising does not generate market power and after the ban. and the industry is competitive, economic The above-mentioned stability in the profits are driven to zero whether television advertising is allowed or not. This im- number and identity of firms in the cigarette industry, which in fact extends back plies essentially no change in profit rates. to the 1930s, raises three issues. First, it Industry profitability is measured by does not mean that the presence or abthe price-cost margin using Census of l 1 1 (“Ciga- sence of television advertising had no imManufactures data for SIC e pact on the ease of entry. It means simply rettes”). Since my test concerns a single industry, the problems with comparing that advertising’s impact was not suffimargins among industries noted by Ornstcient to actually elicit new firm entry. ein [1975] a n d Liebowitz [1982] are Since new firm entry necessarily involves new brand entry, ease of brand entry is a avoided. proxy for ease of firm entry (subject to the The last performance measure is entry. above caveat). Second, such structural staA central tenet of the market power theory bility suggests the presence of other deteris that advertising is a barrier to entry, rents to entry. I assume that these are conwhereas if advertising promotes competition, it will ease market entry, as argued stant during the study period. This inrespectively by Bain [1956] and Brozen cludes the possible entry-deterring effects of publicity regarding the hazards of [1974]among others. Entry is expected to smoking and the consequent expected rebe easier (more difficult) after the ban if advertising promotes monopoly (competi- duction of demand. As Calfee [1985]obtion). Since the number and identity of cig- serves, by the early 1960s, the harmful arette firms is essentially unchanged from (e.g., cancer-causing) effects of smoking 1960 to 1980 (see below), brand entry only were widely known. Third, entry or its abis analyzed. This makes the monopoly presence is neither necessary nor sufficient to diction somewhat ambiguous. In particuidentify competition or its absence. Rilar, Schmalensee’s [1978]brand proliferavalry can exist among incumbent firms, tion argument implies that excessive brand and the impact of advertising on such rientry might be expected prior to the ban valry can be identified using the preas extant firms attempt to createfirm entry viously defined non-entry competition barriers, and such entry might diminish proxies. after the ban. Nevertheless, the prediction A final point concerns advertising as under the competitive theory remains uncapital. If television-generated advertising changed, and increased entry after the ban capital does not depreciate rapidly, its efwould conflict with this view. fects might linger for perhaps a few years
ECKARD: CIGARE'ITE ADVERTISING B A N
after the ban, depending on the depreciation rate.12For example, the change in firm demand elasticities, which underlies profitability and stability predictions, might occur gradually, rather than (say) in the first year after the ban.I3 Because the preban/post-ban distinction would no longer be sharp, my tests would be less likely to detect changes. Nevertheless, the ten- year post-ban period should be sufficiently long to contain a non-trivial period following the transition to an insignificant stock of television-generated advertising capital. V.
DATA
The principal data used in this study are from Maxwell [1986]. He reports annual U.S.sales figures, in physical units (billions of cigarettes), for virtually all cigarette brands sold in the U.S.between 1925 and 1985. The raw data are arranged by brand for each of the six U.S.cigarette manufacturers, with each brand being further broken down by specific brand variations (e.g., Marlboro Lights and Marlboro 100s). To compute brand shares, I aggregate the sales of a11 variations of the same brand (e.g., Marlboro's share includes all eleven Marlboro brand variations), except when a brand is sold in both filter and non-filter variations. I treat these as separate brands. For example, the Philip Morris (non-filter) share is the sum of Philip Morris (non-filter) Regular and Kings, and does not include Philip Morris filter cigarettes sold briefly during the 1960s. I seg12. Thomas [1989]estimates that advertising capital depreciates rapidly, basing her conclusion in part on an analysis of cigarette advertising. See also Comanor and Wilson [1979]. 13. The main exception to this would be the impact on entry under the competitive theory, i.e., the ban should have an immediate impact here. In fact, new brands denied the entry-facilitatingmechanism of television advertising might actually be at a greater disadvantage initially because extant brands have undepreciated stocks of television advertising capital. As this stock depreciates, the disadvantage of new entrants declines (but does not disappear). Schneider et al. [1981]use this argument to explain the virtual cessation of new brand entry during the first four years after the ban.
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regate filters and non-filters because of the strong secular trend away from non-filter cigarettes during the study period. The brand sample consists of twentyfour brands sold in all years from 1960 to 1980. Table I1 presents the data used in my analysis of this sample for the 1960-69 and 1971-80 time periods. The first column for each period reports the mean market share, followed by its standard deviation. The sample brands account for 94.4 percent of all cigarette sales during 1960-69, and 83.0 percent during 1971-80. In terms of absolute sales, the sample brands increase from about 477 billion cigarettes sold per year for 1960-69, to about 489 billion for 1971-80. The total share of the eight non-filter brands dropped 23.0 percentage points between the two periods, while the total share of the sixteen filter brands gained 11.6 percentage points. The last two columns for each time period in Table I1 summarize the results of a simple linear regression of market share on time for each brand. The standard error of the time trend regression estimate is reported, along with the coefficient of the independent time variabIe and its statistical significance. All eight non-filter brands have statistically significant negative share trends in both periods, while only two of the sixteen filter brands have statistically significant negative trends in both periods. My firm sample consists of the six firms reported in Maxwell [1986]. They account for at least 99.5 percent of U.S.cigarette sales in each year from 1960 to 1980. Firm shares are calculated using all brands sold by each firm, not just the twenty-four in my brand sample. Table I11 summarizes the firm data following the format of Table 11. American Brands a n d the Liggett Group show statistically significant share declines during both periods, while Philip Morris has statistically significant share increases. The other firms' shares do not show definite trends over both periods. American and Liggett have the largest
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126
TABLE I1 Brand Market Shares
Brand Name
Mean
1960-69 Time trend SD Coeff SEa
1971-80 Mean
SD
Time trend Coeff SE”
Alpine
0.51
0.04
0.00
0.04
0.20
0.10
-0.03*
0.01
Belair
1.12
0.63
0.19,
0.25
1.53
0.21
-0.06*
0.11
Benson & Hedges
0.97
1.18
0.34*
0.63
4.26
0.35
0.17
10.27
2.82
-0.93*
0.29
3.49
0.94
0.10* -0.31*
Chesterfield (nf)
3.44
1.30
-0.42*
0.24
1.00
0.36
-0.12*
0.05
Herbert Tareyton (nf)
0.35
0.15
-0.05*
0.04
0.06
0.03
-0.01*
0.01
Kent
6.45
0.90
-0.28*
0.27
4.15
1.10
-0.34*
0.45
Kool
3.82
1.57
0.50*
0.41
9.42
0.76
0.04
0.79
0.58
0.14
-0.04*
0.03
0.18
0.07
-0.02*
0.01
4.43
0.89
-0.28*
0.23
1.84
0.56
-0.18*
0.06
6.04
2.03
-0.66*
0.29
1.52
0.46
-0.15*
0.12
0.60
15.11
2.04
0.65*
0.56
0.12*
0.13
Camel (nf)
Kool
(nf)
L&M Lucky Strike (nf) Marlboro Newport Old Gold Old Gold (nf) Pall Mall (nf) Parliament Philip Morris (nf) Raleigh Salem Spring Tareyton Viceroy Winston
0.38*
5.85
1.29
1.46
0.26
-0.02
0.27
1.14
0.38
0.93
0.09
-0.02
0.08
0.67
0.19
-0.06’
0.02
0.35
0.18
-0.06,
0.05
0.05
0.03
-0.01*
0.00
12.97
1.89
-0.56*
0.92
5.53
1.22
-0.40*
0.16
1.85
0.14
-0.04*
0.08
1.51
0.20
-0.06*
0.07
1.23
0.46
-0.15*
0.06
0.32
0.10
-0.03*
0.01
2.24
0.55
0.17‘
0.24
2.12
0.43
-0.13*
0.14
8.47
0.43
0.03
0.45
8.75
0.12
0.03
0.10
0.22
0.08
0.01
0.08
0.06
0.04
-0.01*
0.01
3.11
0.78
0.25*
0.18
2.64
0.57
-0.19*
0.03
3.85
0.26
0.26
2.62
0.68
-0.22,
0.10
13.92
1.60
0.42
14.80
0.95
-0.29*
0.35
*l percent significance level nf %tandard error of the estimate
=
-0.03 0.51*
nonfilter
non-filter shares during 1960-80, averaging about 65 percent and 31 percent respectively. VI.
0.10
EMPIRICAL RESULTS
Market Share Stability Table IV presents tests of the difference between means before and after 1970 for the standard deviation of market shares
and the standard error of linear marketshare time trends for both brands and firms. Between 1960-69 and 1971-80 the mean standard deviation of brand shares drops from 0.82 to 0.50, a difference which is statistically significant at the 5 percent level. Between these periods, the mean standard error of the linear brand-share time trends falls from 0.27 to 0.15. This difference is statistically significant at the 1
ECKARD: CIGARETTE ADVERTISING BAN
127
TABLE I11 Firm Market Shares 1960-1969
Finn Name
Mean
SD
Time trend Coeff SE
Mean
1971-1980 Time trend SD Coeff SE
13.71 16.21 4.16 8.81 24.63 32.48
2.16 1.39 1.22 0.58 4.03 0.47
~~
24.24 Brown & Williamson 12.38 Liggett Group 9.16 10.03 Lorillard 11.06 Philip Morris R.J. Reynolds 33.13 American Brands
1.74 2.48 1.54 0.72 2.11 1.11
-0.52* 0.78* -0.50*
-0.17** 0.65* -0.24**
0.79 0.77 0.33 0.53 0.84 0.88
-0.71* -0.40* -0.40* 0.10 1.33* 0.08
0.28 0.71 0.13 0.53 0.28 0.43
~
percent significance level **5percent significance level
Market Share and Concentration Levels and Trends The next step is to examine the relation between individual firm- and brand-share trends and initial shares for each period. Table V presents the results of regressing the coefficient of the simple brand- or firm-share time-trend variable (see Tables I1 and 111) on initial market share and variables which account for the effects of the secular shift toward filter cigarettes during the 1960-80 period. For example, since non-filter brands had relatively high shares in 1960, a negative correlation might be expected between initial shares 14. If the trend toward filtered cigarettes was nonlinear, and if most of this shift occurred during 1960-69 and trends, independent of advertising's (note that the non-filter brand linear trend coefficients effects. For this reason, brand-share rein Table I1 are all lower in absolute value for 1971-80), gressions include a non-filter dummy then the linear trend-based standard e m r results could be spurious; i.e., the difference between the standard variable (equal to 1for non-filters and zero errors computed from the linear trends could be exagotherwise), and firm-share regressions ingerated. This possibility exists at both the brand and firm levels. To test for this, 1 recomputed the trends in clude the average non-filter share of each each period adding a time-squared term. The mean firm's sales. standard errors from this "quadratic trend for the Looking now at the regression results, brands are 0.18 for 1960-69 and 0.09 for 1971-80. For the firms these means are 0.52and 0.26,respectively. brand-share trends for 1960-69 are negaThe brand mean difference is statistically significant at tively correlated (5 percent significance the 1percent level, while the firm mean difference is significant at the 5 percent level. Relative to the linear level) with initial share, even after actrend results, the differences between mean standard counting for filter status. This correlation errors for brands and firms drop from 0.12 to 0.09 and from 0.30 to 0.26,respectively. Thus, while the linear disappears for 1971-80. Thus, small-share trend somewhat exaggerates the differences between brands exhibit relatively better share mean standard errors between the two periods, the difgrowth before the television advertising ferences remain statistically significant.
percent level. Turning now to the results for firms' shares, the mean standard deviation is essentially unchanged between the two periods (1.62 vs 1.64). However, the mean standard error of the time trends drops from 0.69 to 0.39, a difference which is statistically significant at the 5 percent level. Thus, the evidence suggests that share stability increased after the television ban, supporting the competitive theory of advertising.'*
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ECONOMIC INQUIRY
TABLE IV Tests for Differences Between Mean Stability Measures: Pre-TV Ad Ban vs Post-TV Ad Ban Brands
1. S t a n d a r d deviation of s h a r e s 1960-1969 1971-1980 2. Standard error of linear share time trend 1960-1969 1971-1980
Mean
SE
t-statistic
0.82 0.50
0.15 0.10
2.65**
Mean
SE
t-statistic
0.27 0.15
0.04 0.04
2.79*
Mean 1.62 1.64
SE
t-statistic
0.26 0.54
0.06
-
-
Firms 1. S t a n d a r d deviation of shares 1960-1969 1971-1980 2. S t a n d a r d error of linear share time trend
Mean 1960-1969 1971-1980
0.69 0.39
SE 0.09 0.08
-
t-statistic -
3.06**
*l percent significance level, two-tailed test **5 percent significance level, two-tailed test
ban, an advantage which disappears after the ban. This evidence is inconsistent with the market power theory. In contrast, initial firm shares and firm-share trends show no correlation in either period, a possible upshot of the small sample size (d.f.=3 for the two-variable equations). This evidence neither supports nor contradicts either theory. Additional information on marketshare trends can be obtained by examining industry-concentration trends. The average firm HHZ increases slightly between the two periods (from 2161 to 2229), while the average brand HHI decreases slightly (from 770 to 761), although the difference between either pair of means is not statistically significant. Table VT presents the results of regressing annual brand and firm HHIs on time for the two periods. The brand HHI has a clear negative trend during 1960-69. During 1971-80 the trend is positive although not statistically significant. The firm HHI also has a significant
negative trend during 1960-69. During 1971-80, it has a strong positive trend. Thus before the television advertising ban both brand and firm concentration were de~1ining.l~ After the ban, the brand HHI decline disappears, while the firm HHI trend clearly reverses. These results contradict the market power theory.
15. Under the competitive theory, this trend could be explained as a continuation during the 1960s of an adjustment to lower industry concentration from the introduction of television advertising in the 1950s, as suggested in Lynk [1981]. In addition, it could be argued that the secular shift away from non-filter cigarettes (beginning circa 1950) is responsible, as high share non-filter brands continued to decline during the 1960s. But this would not necessarily imply a decline in HHI. The impact on HHI depends on how the consequent filter share increase is distributed among individual brands. For example, if it is concentrated in the top two or three brands, HHI could increase. As it happens, of the top three filter brands during 1960-69, Winston’s share increased, Kent’s decreased, and Salem’s was stable. The 1960 market share (rank) was 11.2 percent (2nd) for Winston, 8.1 percent (4th) for Kent, and 7.5 percent (5th) for Salem.
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129
TABLE V Regressions Explaining Market Share Trends (Dependent variables are time trend coefficients from Tables I1 & 111) Brands
Time Period
1960-1969
1971-1980
Independent Variables Non-Filter Initial Share "Dummy"
-0.044 (-3.07) * -0.032 (-2.64)f* -0.000 (-0.01) -0.003 (-0.26)
N
R2
-
24
0.27
0.39 (-3.50)'
24
0.52
-
24
0.00
24
0.00
N
R2
-0.093 (-0.99) Firms
Time Period
1960-1969
1971-1980
Independent Variables Initial Share Filter Share
-0.031 (-1.23) -0.012 (-0.38) 0.014 (0.36) 0.011 (0.30)
-0.011 (-0.98)
-0.021
6
0.09
6
0.09
6
0.00
6
0.00
(-1.28)
*1 percent significance level, two-tailed test **5percent significance level, two-tailed test (t-statistics are shown in parentheses)
Profitability I turn now to an examination of the industry price-cost margin (PCM) before and after the ban. I define the PCM as follows: PCM= [VP - (PR + C M + ADV)YVP
where VP is value of production, PR is payroll, CM is cost of materials, and ADV is advertising expenditures.16Data for VP, 16. Domowitz et al. [1986] suggest adjusting the PCM to remove the spurious effects of inventory fluctuations. However, this is not necessary here because the Census reports value of production for SIC X111, not value of shipments. Note also that the PCM is defined net of advertising expenditures. Otherwise, as noted by Scherer [1980] and Liebowitz [1982], given Census variable definitions the PCM would implicitly contain the advertising-to-sales ratio, creating a spurious positive correlation between the two variables.
PR, and CM are from the Census of Manufactures and Annual Survey of Manufactures (SIC##2111,"Cigarettes"), while data for AD V are from Table I. Because of missing advertising data, PCMs cannot be calculated prior to 1963.The mean value for the PCM increases from 35.9 percent during 1963-70 to 40.9 percent during 197180, a difference which is significant at better than the 1percent level (t=3.79).Thus, price-cost margins in the cigarette industry are higher after the ban. The variation in advertising intensity after the ban (see Table I) allows identification of the separate effects of the cessation of television advertisements and overall advertising intensity on the PCM via multiple regression analysis. To this end, I regress the PCM on a ban dummy variable (equal to zero before the ban and
ECONOMIC INQUIRY
130
TABLE VI HHI Time Trends (HHI = a + b x Time + e) Period 1960-1969 1971-1980
Period 1960-1969 1971-1980
Brands Time -22.5 (-7.92)* 3.78 (1.42)
Firms Time -18.7 (-3.77)* 36.77 (16.9)*
N
R2
10
0.87
10
0.10
N
R
10
0.60
10
0.97
*1 percent significance level, two-tailed test (t-statistics are shown in parentheses)
one afterwards), the industry advertisingto-sales ratio (ASR), and real annual percentage GNP growth (GR), a proxy for possible business cycle effects. The resulting OLS estimate is shown in Table VII.I7 The statistically significant negative sign on GR indicates that cigarette industry margins are countercyclical. The coefficient of ASR indicates that the PCM is negatively related to advertising intensity during the sample period. The positive sign on BAN'S coefficient indicates that the elimination of television advertising increased the PCM, holding constant advertising intensity. These results are inconsistent with the market power view of advertising, and support instead the competitive theory.
Entry The last step in the analysis is an examination of entry. Since virtually all cigarette sales throughout 1960-80 were made
17. Annual percentage GNP growth rates are from the 1987 Economic Report of the President. Industry ASRs are from Table I.
by the same six firms (i.e., no firm entry occurred) the analysis focuses on brand entry. Twenty-one new brands were launched during 1960-69, compared to fourteen during 1971-80.'* Of these fourteen, thirteen entered during 1975-80, and only one entered during 1971-74 (in 1971). For 1975-80, the entry rate was 2.2 brands per year, about the same as the 2.3 brands per year for 1960-70. To measure entry success, I compute the mean market share of new brands in their third year. For brands entering in 1960-69 this share is 0.60 percent, and is somewhat higher (0.65 percent) for the 1975-80 entrants. The sole 1971-74 entrant (Maverick) lasted but one year.19 Thus, the ban was followed by a virtual cessation of brand entry which lasted four years, during which advertising intensity was substantially lower than before the ban (see Table I). The renewal of entry in 1975 corresponds to a period 18. There was no pre-ban entry rush. Four new brands were introduced in 1970, two in 1969 and one in 1968. Four brands also entered in 1964 and in 1966. The annual entry rate for 1968-70 equaled that for 1960-67. 19. The mean third-year share for the four 1970 entrants was 0.34 percent.
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131
TABLE VII Regression of Price-Cost Margin on Ban Dummy, Advertising-to-Sales Ratio, and GNP Growth PCM
=
-
46.3 +
3.88 BAN (4.09)"
N=18
R2-0.78
0.89 ASR - 0.46 GR (-3.33)f (-2.32)**
*1 percent significance level **5 percent significance level (t-statisticsin parentheses)
of increasing advertising intensity which culminated at levels higher than before the ban. In sum, advertising is associated with brand entry.20Implications for firm entry are somewhat ambiguous (see discussion in section IV); however, contrary results would have been inconsistent with the competitive theory of advertising. The relationship between firm size and entry is examined using the data in Table VIII, which show the number of new brands and their success (again measured by third-year market share) for each firm ranked by mean market share in each period. If advertising is more advantageous to large firms, this should be reflected in relatively greater success by large firms in bringing new brands to market before the ban. The top two firms account for 40 percent of all new brands in 1960-69 and 43 percent in 1971-80. The correlation between firm market share and average third-year brand share for 1960-69 and 1971-80 is, respectively, +0.26 and +0.51, although neither of these is significantly different from zero (d.f.=4). The mean third-year share for the eight brands introduced by the top two firms in 1960-69 is 0.76 percent, compared to 0.50 percent for the thirteen brands introduced during this period by the next four firms. For 1971-80,
20. The simple correlation between advertising intensity and the number of new brands per year during 196340 is
[email protected]).
the same comparison is, respectively, 0.87 percent (six brands) and 0.40 percent (eight brands). Neither of these differences is statistically significant. However, this picture changes for the 1971-80 period if two outliers are ignored. Without second-ranked Phillip Morris' Merit (third-year share equals 2.93 percent) and fifth-ranked Lorillard's Golden Lights (third-year share equals 2.38 percent), the mean third-year new-brand share is 0.46 percent for the top two firms (five brands) and 0.12 percent for the remaining firms (seven brands), a difference which is statistically significant at the 5 percent level (t=2.39).In addition, the simple correlation between firm share and the average third-year share of new brands is +0.86, statistically significant at the 1 percent level (t=3.51). Accordingly, there is weak evidence that a large-firm advantage existed after the ban, rather than before. VII. SUMMARY AND CONCLUSION
The premise of this paper is that the television advertising ban had a non-trivial impact on competition, either adverse or beneficial depending upon the relation between advertising and competition. The ban therefore constitutes a quasi-experiment of the effects of advertising on competition. My tests consist of pre- and postban comparisons of (1)firm and brand market-share stability, (2) firm and brand market-share and industry-concentration
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TABLE VIII Firm Size and Entry 1960-69
Firm R.J. Reynolds American Brands Brn & Williamson Phillip Morris Lorillard Liggett Group All Firms
Mean Firm Share
Number of New Brands
33.13
4 4
24.24 12.38 11.06 10.03 9.16 100.00
Mean New Brand Share in Third Year
3
0.52 1.01 0.16 0.56 0.65
3
0.62
21
0.60
3
4
1971-80
Firm R. J. Reynolds Phillip Morris Brn & Williamson American Brands Lorillard Liggett Group All Firms
Mean Firm Share
Number of New Brands
32.48 24.63 16.21 13.71 8.81 4.16 100.00
3 3
levels and trends, (3) industry price-cost margins, and (4)new brand entry. The results indicate that, first, brand and firm shares are more stable after the ban, net of trend effects. Second, leading-brand shares and brand and firm concentration were declining before the ban, and are stable or increasing after the ban. Third, the ban appears to have increased profit margins, and these margins are negatively related to advertising intensity during the study period. Finally, new brand entry vir-
2 1
4 1 -
14
Mean New Brand Share in Third Year 0.59 1.15 0.10 0.06 0.72 0.06 0.60
tually ceased during the first four years after the ban, resuming only in conjunction with a substantial increase in advertising intensity. Also, brands introduced by leading firms may have been relatively more successful after the ban. On balance these results are inconsistent with the market power theory of advertising. The evidence suggests that, whatever other impacts the television ban has had, its unintended side-effect on cigarette industry competition has likely been negative.
ECKARD: CIGARETTE ADVERTISING BAN
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