A Study on the Relationship between Market Structure and Advertising and Profitability in the Korean Manufacturing Industry

Kim Kyung Yup

This is an empirical study about the relationship between market structure and advertising and profitability in the Korean manufacturing industry during 1984.

Empirical investigation into the market structure and economic conduct and economic performance for a developing economy is a complex task. Not only is there little data, but development is often accompanied by rapid changes in economic structure which may alter the elements of market structure and performance. And also it is widely believed that the change in advertising intensity affects competition. The objective of this study is to empirically test the validity of traditional structure-conduct-performance hypothesis for the Korean manufacturing industry. This primary traditional structure-conduct-performance hypothesis states that performance in an industry depends upon the conduct of sellers, and that conduct in turn depend on the structure of the relevant market. The market structure forms the basis for conduct that includes actual pricing policies including conspiracy, mutual forbearance, and price leadership as well as secret price cutting and aggressively competitive pricing at "the going price," etc. Conduct, in turn, affects firms' revenue and cost as well as influencing profitability and other measures of performance. Economic performance can also be affected by other factors such as entry barriers, foreign competition, and industrial policy. Moreover, institutional features and motivation of business enterprises might constitute fundamental influences on their economic performances.

In this study I investigated the determinants of concentration and advertising and profitability. The empirical results on concentration indicate that early concentration ratios are predictors of concentration ratio. In addition the measures of entry barriers have somewhat conclusive results as factors of determinant for concentration. And profit rates is always responsible for the advertising-sales ratio, but growth of demand is negative and significant in advertising equation. Finally the result on profitability strongly indicate that concentration ratio and advertising sales ratio are virtually always strong determinants of profit rates. Nevertheless, the measure of entry barriers appears to affect not directly on profit rates but indirectly through the effect on concentration.

In conclusion, this study shows the strong relationship between concentration and advertising and profitability in the Korean manufacturing industry during 1984.