Marriott Alumni Magazine

Spring Summer 1977 Exchange

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The Satisfied Consumer-A Source of Market Power by Darral G. Clarke This article is derived from the author's monograph, Cumulative Advertising Effects: Sources and Implications, to be published by the Marketing Science Institute, Cambridge, Massachusetts. American firms believe in the ability of advertising to affect the sales of their products. Advertising s an integral part of the marketing of the products ranging from toothpaste to computer, but, considering the ubiquitousness of its use, it is surprising how little is known about the manner in which advertising affects the purchase behavior of individuals. This lack of concrete knowledge is caused, at least in part, by the complexity of the consumer decision-making process in buying even the simplest of products. Because so little is known about advertising's effects on consumer decision making, these effects are often neglected in studies of competition and market structure. Economists and others have been concerned with the role that advertising allegedly plays in erecting barriers to block the entry of new firms into established markets and in other manifestations of market power in competition. Among the more frequently cited indications of market power are a few large competitors in a market, high profits and advertising expenditures relative to sales volumes, and market share. Examples of industries in which 1) the market is dominated by relatively few firms, 2) entry is difficult, and 3) advertising is a dominant feature of competition are very easy to find. What is not clear is whether the existence of such conditions is sufficient evidence to name advertising a source of market power in these industries. Market Power at the Breakfast Table The cereal industry has been cited as an example of market power, and the Federal Trade Commission has claimed that advertising is a major source of that market power. The cereal industry is dominated by six or seven firms, which between them offer over 100 different brands accounting for approximately 98 percent of cereal sales. There is relatively little price competition, and advertising expenditures as a percent of sales are high (14.8 percent between 1954-57). It is easy to see that the classical measures of market power and barriers to entry are present. If attention is drawn to the individual competing brands, however, the evidence that advertising provides a big advantage to the larger brands is often contradictory. To be more specific, consider the nutritional cereals as a small submarket of the cereal market. Nutritional cereals were introduced in 1956 when Kellogg's began marketing "Special K." In 1961 Quaker Oats introduced "Life" cereal and General Mills countered with "Total." In 1966 these three cereals were the only nutritional cereals of any substantial size, and Special K had attained a 47 percent share of the nutritional cereal market while Total and Life had 30 and 23 percent market shares, respectively. This dominant market share is indicative of a potentially powerful position in the market, and if FIGURE 1 Advertising Effectiveness and Consumer Market Structure Rejectors What is it? What of it? Oh, yes… Infrequent Purchasers Product Loyals Brand Loyals Importance of advertising as an information source Likelihood of purchase Advertising effectiveness

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