Price, Quality and Advertising Competition: An Econometric Investigation of the United Kingdom Car Market

This paper seeks to explain the behaviour of an oligopolistic market, the United Kingdom market for cars, over the late 1950s and through the 1960s. Our primary concern is to explain market-share behaviour and thus establish the form of the demand function faced by the individual firm or by the separate divisions of such a firm. Given such information, we will be able to estimate the degree of monopoly in the industry by determining the mark-up of price over marginal costand, thereby, make some estimate of the size of the welfare loss associated with monopoly. The main obstacle to the capture of the parameters of demand functions facing specific firms is the problem of allowing for the qualitative differences among the products of different firms or divisions of firms both at a point in time and through time. Quality differences and quality changes are integrated by using a technique developed in a previous paper 3,2 The car market shows a substantial degree of product differentiation, objectively through differences in the bundles of characteristics offered in different models, and subjectively through advertising. The technique used for integrating differences in specification involves deriving implicit prices for each of the qualitative attributes, and then synthesizing the expected price for a model with a specific set of these attributes. The difference between actual and expected price is then the quality-adjusted price for the model in question. As well as explaining market-share movements for the different car manufacturers in terms of variations in price, quality and advertising, we will also, simultaneously, be concerned with the determinants of advertising appropriations. We are thus allowing for advertising to influence consumer decisions about the variety of car to be purchased, but we are also allowing for current sales to have a feedback on current managerial decisions about the level of advertising expenditure. We are assuming there is no feed-back from current sales and current advertising policy to current price and quality decisions. The prices of new cars are typically announced in October (at the Motor Show) prior to the model year and show little tendency to fluctuate during the year. Similarly, the gestation period for any substantial change in specification will typically be in excess of one year. Model changes