This paper examines Bain's Hypothesis that firms in the automobile industry engage in advertising competition and price collusion. It develops a game theoretic model, basing price on product characteristic and advertising on pure and mixed strategies. Solution concepts such as Cournot, Nash and Prisoner's dilemma are possible. The paper then moves into regression results of advertising outlays in newspaper, general magazines, spot television, and network television, given the firm's cashflow, OPEC influence, and Leader-follower hypotheses. When multicolinearity and serial correlation are adjusted for, the results corroborate Bain's advertising hypothesis with price collusion.
Get full access to this article
View all access options for this article.
References
1.
AndersonR. M., An Elementary Core Equivalence Theorem, Econometrica, 46, pp. 1483–1487, 1978.
2.
AndersonR. M., A Market Value Approach to Approximate Equilibria, Econometrica, 50, pp. 127–136, 1982.
3.
AndersonR. M., Notions of Core Convergence, in HildenbrandW. and Mas-CollelA. (editors), Contributions to Mathematical Economics, Holland: North-Holland, 1986, pp. 25–46.
4.
BainJoe S., Industrial Organization, New York: John Wiley and Sons, Inc., 1959, Third printing 1967.
5.
BainJoe S., Price Theory, New York: John Wiley and Sons, Inc., 1952, Third Printing, 1967.
6.
BainJoe S., Barriers to New Competition, M.A.: Harvard University Press, 1956.
7.
BalchMichael, Oligopolies, Advertising, and Non-Cooperative Games, in Kuhn, H. W., and Szego, G. P., Differential Games, and Related Topics, N.Y.: North-Holland Publishing Company, 1971.
8.
BaumolWilliam J., Business Behavior, Value and Growth, N.Y.: Harcourt, Brace and World, Inc., 1967.
9.
BertrandJoseph as discussed by EdgeworthFrancis Y., The Pure Theory of Monopoly, Papers Relating to Political Economy, I, London: Macmillan and Co., Ltd., 1925, pp. 111–42.
10.
BhagwatiJagdish, ed., Essays in International Economic Theory, Mass.: MIT Press, 1983, Vol. II.
11.
BoxGeorge E. P., Use and Abuse of Regression in Tiao, GeorgeC., The Collected Works of George E. P. Box, Belmont: Wadsworth Advance Books and Software, 1984.
12.
BoyleStanley E. and HogartyThomas F., Pricing Behavior in the American Automobile Industry 1957–71, The Journal of Industrial Economics, Vol. XXIV, December, 1975.
13.
ChamberlinEdward H., The Theory of Monopolistic Competition, Mass.: Harvard University Press, 1965.
14.
CournotA. A., Researches into the Mathematical Principles of the Theory of Wealth, trans, by NathanielT.Bacon, New York: Macmillan Co., 1929.
15.
DebreuGerard, Economic Theory in the Mathematical Mode, The American Economic Review, June 1984, p. 269.
16.
DebreuGerard, Four Aspects of the Mathematical Theory of Economic Equilibrium, in Mathematical Economics, New York: Cambridge University Press, 1983.
17.
DebreuGerard and ScarfH., A Limit Theorem on the Core of and Economy, International Economic Review, September 1963, 4, pp. 235–46.
18.
DebreuGerard and ScarfH., The Limit of the Core of an Economy, in McGuireC. B. and RadnerRoy, eds., Decision and Organization: A Volume in Honor of Jacob Marschak, Amsterdam, 1972.
19.
DhrymesPhoebus J., Econometrics, New York: Springer-Verlag, 1994.
20.
DubeyP. and ShubikM., Trade and Prices in a Closed Economy and Exogenous Uncertainty and Different Levels of Information, Econometrica, 45, pp. 1657–1680.
21.
Eiteman, Multinational Business Finance, New York: Addison-Wesley Publishing Company, 1992, 6th Edition.
22.
FriedmanJ. W., Oligopoly and the Theory of Games, Amsterdam: North Holland, 1977.
23.
GilibertoMichael, Interest Rate Sensitivity in the Common Stocks of Financial Intermediaries: A Methodological Note, Journal of Financial and Quantitative Analysis, Vol. 20, no. 1, March 1985, pp. 123–126.
24.
GrabowskiHenry G. and MuellerDennis C., Imitative Advertising in The Cigarette Industry, The Antitrust Bulletin, Vol. XVI, Summer 1971, pp. 257–292.
25.
GrabowskiH. and MuellerD. C., Non-Price Competition in the Cigarette Industry”, The Antitrust Bulletin, XIV, 1969, pp. 607–628.
26.
GrabowskiH. and MuellerD. C., Non-Price Competition in the Cigarette Industry: A Comment, The Antitrust Bulletin, XIV, 1970, pp. 679–686.
27.
GujaratiD., The American Statisticians, February, 1970, pp. 50–52.
28.
GujaratiD., Basic Econometrics, New York: McGraw Hill Book Company, 1988, pp. 446–448.
29.
HarsanyiJohn C., Rational Behavior and Bargaining Equilibrium in Games and Social Situations, New York: Cambridge University Press, 1977, p. 101.
30.
JastramRoy W., Advertising Outlays under Oligopoly, The Review of Economics and Statistics, Vol. XXXI, May, 1949, pp. 106–109.
31.
JohansenLeif, A Calculus Approach to the Theory of the Core of an Exchange Economy, The American Economic Review, Vol. 68, Number 5, December 1978, pp. 813–820.
32.
LuceDuncan R. and RaiffaHoward, Games and Decisions, N.Y.: McGraw-Hill Book Co., 1952.
33.
Mas-ColellAndreu, Perfect Competition and the Core, Review of Economic Studies, 1982, XLIX, pp. 15–30.
34.
ModiglianiFranco, New Developments on the Oligopoly Front, Journal of Political Economy, Vol. LXVI, June 1958.
35.
NashJohn, Equilibrium Points in N-Person Games, Proceedings of the National Academy of Sciences of the U. S. A., 1950, 36, pp. 48–49.
36.
NeubergerJonathan A., Risk and Return in Banking: Evidence from Bank Stock Return, Economic Review, Federal Reserve Bank of San Francisco, Fall 1991, No. 4, pp. 18–30.
37.
OkuguchiKoji and SzidarovszkyFerenc. The Theory of Oligopoly with Multi-Product Firms, New York: Springer-Verlag, 1990.
38.
PindyckRobert S. and RubinfeldDaniel L., Economic Models and Economic Forecasts, New York: McGraw Hill, Inc., Third Edition, 1991.
39.
RamrattanLall B., Rivalry in the U. S. Automobile Industry: An Advertising Approach, 1986, Unpublished Ph.D. Dissertation, The New School for Social Research.
40.
RamrattanLall B., The Impact of Imports on Price Competition in the Automobile Industry, The American Economist, Fall 1991.
41.
SaccoP. L., Adaptive Response and Cournotian Behavior. The Case of Linear Demand with Two Firms, Economic Notes, Vol. 20, no. 3, 1991.
42.
SchellingT., The Strategy of Conflict, Mass.: Harvard University Press, 1960.
43.
SchnabelMorton, A Model of Cigarette Advertising, The Antitrust Bulletin, Fall-Spring, 1973.
