Advertising and Market Share Dynamics

This paper examines the role of advertising in the evolution of market structure in the US mutual fund industry. First, I present empirical evidence that mass advertising in this industry creates endogenous sunk costs, resulting in patterns consistent with Sutton’s (1991) predictions. In particular, I contrast evolutionary patterns of advertising spending and market structure between two segments of the industry, one in which mass advertising is e¤ective (no-load segment) and the other in which mass advertising is much less so (load segment), due to di¤erences in their distribution methods. I then estimate a dynamic model of advertising using the two-step estimator proposed by Bajari, Benkard, and Levin (2007). No-load …rms and load …rms face di¤erent advertising elasticities of demand because of the way their funds are marketed to consumers, and it leads to di¤erent optimal advertising choices and market structure dynamics in the two segments. I recover the structural parameters of interest, such as the advertising elasticity of demand in each segment, goodwill accumulation equation, entry costs, and sell-o¤ values. Using the model estimates, I simulate market share dynamics when …rms follow di¤erent advertising strategies. Thus, this paper provides insights on how strategic advertising decisions in‡uence market structure.