An Empirical Study on the Simultaneity of Advertising, Concentration and Profitability(5-digit Manufacture-industrial data)

Lee, Su-Bum(Department of Economics, Graduate School Pusan National University Pusan National University)

The purpose of this study is to empirically test the simultaneity of traditional structure-conduct-performance hypothesis for the Korean manufacturing sector. In order to test the relationships among the variables, I construct the simultaneous equations system.

This study is divided into three parts; i. E., the theoretical background, the examination of analytical frame work employed and the empirical tests of the model mentioned here under.

The data set employed in this study consists of 276 Korean manufacturing industries of which 198 are consumer and 79 are producer goods and in nineteen eighty-three('83 oligopoly 103, competition industry 173) and in nineteen eighty-eight('88 oligopoly 91, competition 185). The properties of classing these four group are first, I used Bank of Korea's input-output analysis(1983, 1987)and classify consumer goods and producer goods, second used the criterion of CR₃ and classify oligopoly and competition industry.

I used cross-section data of Korean Industry Classification. Most of studies, until recently, showed the positive relations between advertising-concentration and the advertising-profit rates, In this thesis estimated advertising intensity, industrial concentration and profit rates with Ordinary Least Square(OLS) method, and SYS method(3SLS) used by 5-digit industrial data in the Korean Manufacture industry.

The conclusions are summarized as follows:

1. By using simple regression, I am trying to know whether our country manufacture has invert U-shape hypothesis or not. but only product industry has U-shape.

2. At multiple regression and simultaneous equation regression, advertising intensity is explained by profit rate and concentration rate is mainly explained by MID and profit rate is explained by Advertising Intensity.

3. The advertising intensity showed that it has significant positive relations by the concentration rates and profit rate according to some industry.

4. The concentration rate have a big influence by MID among the variables. If the market structure will distortion, the barriers to entry will rising by the excessive advertising, therefore, the market become more monopolized or oligopolized by the biggest firms and the damage is large.

5. Profit rate depends on advertising intensity and CSR(Capital Sales Rates). In this case, advertising intensity has positive relation, as a result, depending of non-price competition, We analyzed the relation between the advertising-concentration and the advertising-profit rate to understand the effects on resource allocation of advertising.

These results proved indirectly that advertising has simultaneity, i.e., advertising intensity is decided by profit rate and profit rate is decided by advertising rate and advertising rate influences concentration rate and concentration influences profit rate. And these trends prove the background of theoretical which is method of structuralist' approach, i.e, advertising influences structural variable which is concentration rate and again market structure influence profit rate which is market performance The main object of this study concerned about economical effect of advertising, that is to say, advertising effects the market share and profit and sometimes increase the entry barriers and price but in other aspects give some information, so we should not treat advertising briefly.

Consequently, in the context of the policy actions of industrial organization advertising should be handled as an important variables.