lndustria!lVIarKet ~uucture
`and Economic Performance
`
`Third Edition
`
`P.M. Scherer
`Harvard University
`
`David Ross
`Williams College
`
`Houghton Mifflin Company Boston
`Dallas
`Geneva, Illinois
`Palo Alto
`Princeton, NJ
`
`ACRUX DDS PTY LTD. et al.
`
`EXHIBIT 1589
`
`IPR Petition for
`
`U.S. Patent No. 7,214,506
`
`Page 1 of 25
`
`

`

`167
`159
`153
`
`153
`
`146
`141
`97
`
`97
`
`94
`90
`70
`57
`
`57
`
`55
`52
`38
`33
`29
`18
`15
`
`15
`
`7
`4
`2
`
`XV
`xiii
`X
`
`Statistical Evidence on Merger Outcomes
`The Motives for Merger
`Broad Trends in Merger Activity
`
`Mergers: History, Effects, and Policy
`
`ChapterS
`
`The Impact of Government Policies
`Stochastic Determinants of Market Structure
`Economies of Scale
`The Determinants of Market Structure
`
`Chapter4
`
`Vertical Integration in American Industry
`The Diversification of American Corporations
`Concentration in Particular Markets
`The Position of the Largest Corporations
`Industry Structure
`
`Chapter3
`
`Conclusion
`Workable Competition
`Doubts Concerning the Profit Maximization Hypothesis
`The Problem of Second Best
`Qualifications and Doubts
`The Case {or Competition
`Competition Defined
`Monopoly
`The Welfare Economics of Competition and
`
`Chapter 2
`
`The Role of Public Policies
`An Introductory Paradigm
`The Scope and Method of Industrial Organization Analysis
`Introduction
`
`Chapter 1
`
`Preface
`List of Tables
`List of Figures
`
`Contents
`
`BCDI!FGHIJ-D-99876l43210
`
`ISBN' 0-395-35714-4
`
`Library of Congress Catalog Card Number: 89-80961
`
`Printed in the U.S.A.
`
`Miffiin Company, One Beacon Street, Boston, MA 02108.
`pressly permitted by federal copyright law. Address inquiries to College Permissions, Houghton
`tern without the prlor written pennission of Houghton Miffiin Company unless such copying is ex·
`mechanical, including photocopying and recording, or by any infonnation storage or retrieval sya·
`No part o£this work may be reproduced or tranarnitted in any fo.nn or by any means, electronic or
`
`Copyright © 1990 by Houghton Miffiin Company. All rights reserved.
`
`Photograph © 1990 The Museum of Modern Art, New York.
`Mr. and Mn. Joachim Jean Aberbach Fund.
`ColJection, The Museum o£Modem Art, New York,
`Oil on cardboard, 133h X 131
`Cover painting: Paul Klc:e, PiTt at Evening, 1929.
`
`/•"
`
`Page 2 of 25
`
`

`

`483
`479
`468
`458
`453
`450
`449
`
`449
`
`446
`440
`426
`415
`412
`
`411
`
`410
`407
`404
`396
`374
`356
`353
`
`Policy toward Monopoly Positions Abroad
`Proposals to Reform Sherman Act Section 2
`The Predatory Pricing Problem
`Renaissance and Decline
`The Alcoa Case and Its Aftermath
`The Emergence of a Rule of Reason
`Monopoly and Monopolization
`
`Structures
`
`Chapter 12 Antitrust Policy Toward Monopoly Market
`
`Conclusion
`Time Series Studies
`Cross-Section Studies
`Measurement Problems
`Basic Paradigm
`
`Appraisal
`
`Chapter 11 Market Structure and Performance: Empirical
`
`Conclusion
`Other Dynamic Influences Affecting Price
`Entry Deterrence Through Product Differentiation
`Entry Deterrence Through Plant Location Strategy
`Deterring Large·Scale Entry
`Limiting Small·Scale Entry
`Substitution and Long-Run Demand Functions
`
`Chapter 10 The Dynamics of Monopoly and Oligopoly Pricing 353
`
`352
`347
`346
`339
`335
`328
`325
`317
`
`317
`
`Contents vii
`
`Conclusion
`Trade Association Price and Cost Reporting Activities
`Price Leadership
`Oligopoly Pricing and the Conscious Parallelism Doctrine
`The Per Se vs. Rule of Reason Question Revisited
`Antitrust Abroad: A Comparison
`Remedies and Penalties in Price-Fixing Cases
`The Evolution of U.S. Law
`
`Chapter 9 Antitrust Policies Toward Price-Fixing
`
`Arrangements
`
`315
`311
`308
`306
`294
`285
`279
`277
`
`277
`
`275
`275
`
`273
`268
`265
`261
`248
`235
`
`235
`
`233
`231
`229
`227
`227
`
`226
`221
`215
`208
`199
`
`199
`
`198
`194
`174
`
`Conclusion
`The Social Scene
`Secrecy and Retaliation Lags
`Lumpiness and Infrequency of Orders
`A Digression on Cutthroat Competition
`Dynamic Implications of Cost Structures
`Product Heterogeneity
`Number and Size Distribution of Sellers
`
`Chapter 8 Conditions Limiting Oligopolistic Coordination
`
`Cartel Pricing When Costs Differ
`Appendix to Chapter 7
`
`Conclusion
`Order Backlogs, Inventories, and Oligopolistic Coordination
`Focal Points and Tacit Coordination
`Rule·of-thumb Pricing as a Coordinating Device
`Price Leadership
`Overt and Covert Agreements
`
`Chapter 7 Conditions Facilitating Oligopolistic Coordination
`
`Forchheimer's Dominant Firm Model
`The von Stackelberg Leader·Follower Model
`The Cournot Model with Conjectural Variations
`The Quantity-Coumot Model
`Appendix to Chapter 6
`
`Conclusion
`Dominant Firm Behavior
`Imperfect Information and Uncertainty
`The Contributions of Game Theory
`Oligopolistic Interdependence
`
`Chapter 6 Economic Theories of Oligopoly Pricing
`
`Conclusion
`Merger Policy in Other Nations
`U.S. Policies toward Mergers
`
`vi Contents
`
`Page 3 of 25
`
`

`

`703
`687
`
`685
`679
`667
`661
`
`661
`
`ix
`
`Contents
`
`Subject Index
`Author Index
`
`Conclusion
`Other Effects of Monopoly Power
`Other Inefficiencies
`The Welfare Losses Attributable to Resource Misallocation
`Appraisal
`
`Chapter 18 Market Structure and Performance: Overall
`
`660
`644
`630
`621
`614
`
`613
`
`610
`600
`592
`580
`572
`
`571
`
`569
`562
`558
`548
`541
`
`541
`
`537
`
`535
`527
`519
`517
`
`517
`
`508
`494
`491
`489
`
`489
`
`Chapter 17 Market Structure, Patents, and Technological
`
`Conclusion
`The Evidence
`The Links Between Market Structure and Innovation
`The Logic of Patent Protection
`Industrial Innovation
`Innovation
`
`Chapter 16 Product Differentiation, Market Structure, and
`
`Conclusion
`Market Structure and Product Variety
`The Role of Market Structure
`Advertising, Image, and Monopoly Power
`Advertising, Information, and Persuasion
`Competition
`
`Conclusion
`Exclusive Dealing, Requirements Contracts, and Tying
`Exclusive Franchising
`Resale Price Maintenance in Theory and Practice
`The Theoretical Paradox and Its Resolution
`
`Chapter 15 Vertical Restraints: Law and Economics
`
`Appendix to Chapter 14
`
`Conclusion
`Countervailing Power and Consumer Prices
`The Exercise of Buyer Power: Theory
`The Extent of Buyer Concentration
`
`Chapter 14 Buyer Power and Vertical Pricing Relationships
`
`Antitrust Policies Toward Price Discrimination
`The Implications of Discrimination for Economic Welfare
`Types of Discrimination Found in Practice
`Standard Theoretical Cases
`Chapter 13 Price Discrimination
`
`viii Contents
`
`Page 4 of 25
`
`

`

`Competition, and Public Policy (Lexington: Lexington Books, 1987).
`University Press, 1967); and Robert E. McAuliffe, Advertising.
`Jules Backman, Advertising and Competition (New York: New York
`journal of Economic Literature, vol. 17 Uune 1979), pp. 453-476;
`Wilson, 'The Effect of Advertising on Competition: A Survey,"
`1974), pp. 115-156; WilliamS. Comanor and Thomas A.
`dustn"al Concentration: 17u New Learning (Boston: Little, Brown,
`
`~1. Michael Mann in Harvey J. Goldschmid et al., eds., In-
`00 the effects of advertising, see the papers by Yale Brazen
`For systematic expositions of economists' strongly differing
`
`•
`
`1
`lYsis to identify five dimensions.
`a .. Vol. 34 (December 1985), pp. 113-132, who use factor
`•t h Product Differentiation, Really?" Journal of lrulwtrial Eco(cid:173)
`
`..,.. t · Compare Richard E. Caves and Peter J. Williamson,
`
`1
`
`nomic analysis can carry our insights and identifying the value judgments that
`facets of the image differentiation question, probing the bounds to which eco(cid:173)
`through advertising. 2 In this chapter we direct our inquiry mainly to various
`image differentiation, especially the image differentiation created or reinforced
`(or inadequate) differentiation. Most controversial and important in this respect is
`tion there should be and whether certain market conditions might lead to excessive
`and scholars. To the extent that debate persists,. it focuses on how much differentia(cid:173)
`
`This rationale for product differentiation is generally accepted by consumers
`
`the subjective image that accompanies the products they buy.
`as soon walk in the woods. Likewise, different consumers assign varying weight to
`shirts, and some no shirt at all. Some want to fly supersonically; others would just
`butes is especially great. Some men prefer cotton shirts, some silk shirts, some hair
`The diversity of preferences with respect to physical design and performance attri(cid:173)
`although the prices individuals are willing to pay for extra service vary widely.
`locational convenience. Nearly every consumer prefers good service over poor,
`location of ~uppliers, and many will pay a price premium for a certain amount of
`ples' wants are diverse. It is a rare consumer who doesn't value convenience in the
`enterprise economy is a natural and healthy response to consumer demands. Peo(cid:173)
`Most of the product differentiation effort observed in a modern private(cid:173)
`
`only through prestigious retail outlets.
`brand labeling, advertising, the design of attractive packages, and by distributing
`consumer's mind. Sellers attempt to enhance the image of their products through
`products are differentiated in terms of the subjective image they impress on the
`overcome problems in using their products; others are unreachable. Finally,
`Some microcomputer software writers maintain hot lines to advise users how to
`out lines and grumbling cashiers, mollifying the effect with rock-bottom prices.
`prompt, intelligent, and courteous service; others are better known for long check(cid:173)
`utors revealed, some retailers maintain large and well-trained staffs to provide
`previous chapter's discussion of the links between manufacturers and their distrib(cid:173)
`and so forth. Third, firms may offer exceptionally good (or bad) service. As the
`computer may be addressed through complex logical codes or simple pictograms;
`or reflect the genius of a Henry Dreyfuss; beer may be hops-laden or bland; a
`wool worsted or a coarser substitute; the design of an appliance may be mundane
`differences in product attributes. A suit may incorporate the most fmely woven
`store and the local gravel quarry are illustrations. Second, there are physical
`portation costs) than rival locations. The locational advantages of the corner drug(cid:173)
`lect plant or store locations more convenient (in terms of travel time and/or trans(cid:173)
`Four main product differentiation modes can be identified.1 First, sellers may se·
`choices they make in differentiating their goods and services from rival offerings.
`We advance now to firms' product policies-that is, to the important strategic
`
`and Competition
`Market Structure,
`Differentiation,
`Product
`
`Page 5 of 25
`
`

`

`I
`
`I
`
`of Political Economy, vol. 69 Uune 1961), pp. 213-225.
`
`6. George]. Stigler, "'The Economics ofinformation,"journal
`
`York Timu, October 10, 1988, p. A-10.
`way people buy cars.""'n the Road Again, With a Passion," N(U/
`everyone. It's not verbal. It's not rational. It's emotional, just the
`see the scenes they want to identify with; there's a Chevy for
`ized ... but every detail is cold-heartedly calculated. People
`advertisements aired in 1988, he continued, •may look unorgan(cid:173)
`self ... It's the only way." The Chevrolet "Heartbeat of America"
`observed that "Image is not one way to differentiate your-
`mobiles, General Motors advertising executive Sean Fitzpatrick
`
`Explaining the content of television advertisements for auto(cid:173)
`
`23, 1977, p. 102.
`misleading. "Business, Public Out of Sync," Advntising Age, May
`lieved that all or most television advertisements were seriously
`
`In a 1976 Harris poll, 46 percent of the 1,510 respondents be(cid:173)
`
`vol. 41 Uanuary 1977), pp. 50-53.
`mation Content in Television Advertising," journal qf Marketing,
`
`t, ~4Jil Resnik and Bruce L. Stem, "An AnalySis of the Infor-
`'~Ytnore."
`""='orne "so deceptive that dealers themselves can't live with
`ll ~.observed that advertisements for new and used automobiles
`"''on Auto Ads," New York Times, November 19, 1988, p. 52,
`f. See, for example, "New York and Other States Cracking
`l~~quiry, vol. 24 (April1986), pp. 195-212 .
`t. Caves, "Information Structures of Product Markets," Economic
`G1!dStatiJticJ, vol. 65 (November 1983), pp. 668-672; and Richard
`Stephen Martin, "The Size of Selling Costs," Revi(UI qf Economics
`kl!ing expenses, see Leonard W. Weiss, George Pascoe, and
`ing emphasis across industries on media advertising versus other
`percent of manufacturers' sales in 1977. On reasons for the differ(cid:173)
`perurs, tend to be much larger, with a median value of7.75
`tailers, and trade allowances as well as media advertising ex(cid:173)
`of sale displays, coupons, samples, advertising allowances to re(cid:173)
`selling expenses, including the cost of sales representatives, point
`Business Report, 1977(Washington: April1985), pp. 26-41. Total
`3. Federal Trade Commission, Statistical Report: Annual Line qf
`
`dors advertise their prices, Stigler continued, "Search now becomes extremely
`ity, the larger the amount of the consumer's intended expenditure. 6 When ven(cid:173)
`was warranted, and hence competition was more apt to drive prices toward equal(cid:173)
`for the lowest price. In a seminal article, George Stigler showed that more search
`This imperfection can be lessened when consumers search, by foot or telephone,
`desired product or service, the vendors' ability-to charge higher prices is enhanced.
`If consumers lack information on the prices charged by alternative sources of a
`
`the lowest rate (33 percent) during weekday afternoons.
`highest rate of informative advertising (60 percent) occurred during the evening;
`
`and Price Dispersion
`Search, Advertising,
`
`........
`
`1977 (Willlhington: J;985) p. 11'
`s_, Tf'duA TDC. (~ldUU ..... .!ft.\u.7.J Report . .thu ... •
`
`8.0
`8.8
`10.3
`11.0
`11.0
`11.4
`12.9
`13.8
`
`14.6
`20.2
`
`as a Percent of Sales
`Industry Advertising
`
`Soap and other cleaning preparation)
`
`Cigarettes
`Magazines and similar periodicals
`
`Distilled liquors
`Dog, cat, and other pet foods
`Cereal breakfast foods
`Cutlery (including razor blades)
`Soft drink syrups and other flavorings
`
`preparations
`Perfumes, cosmetics, and other toilet
`Over-the-counter drugs
`
`Industry
`
`signs and advertising novelties, and such true miscellanea as the Goodyear Blimp
`category includes the estimated cost of corporate advertising departments, art work, subsidized
`USGPO, 1988), p. 530, drawing upon McCann-Erickson compilations. The miscellaneous
`&uu~t: U.S. Bureau of the Census, StatistUal Ab1trad of the Unittd Staks: 1988 (J'/ashington
`
`102.14
`19.60
`. 99
`.19
`2.38
`17.15
`5.32
`6.95
`22.59
`26.99
`
`Billions of Dollars
`
`Total
`Miscellaneous
`Outdoor
`Farm publications
`Business papers
`Direct mail
`Magazines
`Radio
`Television
`Newspapers
`
`Medium
`
`Table 16.1 Estimated U.S. Advertising Expenditures by Media in 1986
`
`sense of satisfying at least one of the fourteen information content criteria. The
`ties, etc. 5 Only 49 percent of the insertions were found to be informative in the
`such as price, quality, product performance, taste, nutrition, new ideas, warran(cid:173)
`commercials to determine whether they contained information on fourteen points
`probably occupies the opposite extreme. A 1976 study examined 378 television
`ads are written in persuasive fashion. Television advertising in the United States
`more than they inform, 4 and as any erstwhile home seller knows, even classified
`lays in 1986, is preponderantly informative, although some insertions mislead
`varying proportions. Newspaper advertising, accounting for a fourth of U.S. out(cid:173)
`modes is often difficult, since information and persuasion are combined in widely
`sumers to favor a particular brand over alternatives. Drawing a line between these
`informed choices, or it can make competition less perfect by persuading con(cid:173)
`Advertising can perfect competition by helping consumers make better(cid:173)
`
`dustry from which the term soap opera comes.
`sumers goods advertised heavily on television, including (in tenth place) the in(cid:173)
`Prominent among the leaders are industries supplying repetitively purchased con(cid:173)
`industries, ranked in the order of their media advertising/sales ratios for 1977.
`industries are much more advertising-intensive. Table 16.2 lists the ten leading
`didates) devoted 0.66 percent of its sales revenue to advertising.3 However, a few
`breakdowns are available-the median manufacturing industry (among 225 can(cid:173)
`media is shown in Table 16.1. In 1977 -thelast year for whieh detailed industry
`States. How those expenditures were distributed across the various advertising
`In 1986~ it is estimated, $102 billion were spent on advertising in the United
`
`Advertising, Information, and Persuasion
`
`Media Advertising/Sales Ratios, 1977
`The Ten Leading Manufacturing Industries in Terms of
`
`573
`
`Product Differentiation, Market Structure, and Competition
`
`Table 16.2
`
`ture affects firms' product variety and durability choices.
`underlie contending viewpoints. We then examine more briefly how market struc(cid:173)
`
`572 Chapter 16
`
`Page 6 of 25
`
`

`

`J
`
`rived in Chapter 2, note 36, and p. 229 supra.
`
`14. See the profit-maximizing price-cost margin formula de(cid:173)
`venience goods industries.
`which small purchases are made repetitively) but rose in l'lnrroo
`tensity of advertising in convenience goods industries (those in
`more common in less concentrated industries. It fell with the in(cid:173)
`manufacturer-retailer power observations). Price advertising was
`percent for games and toys (the original locus of Steiner's
`with a range of from 0 percent in several food categories to 100
`The fraction of insertions mentioning price averaged 29 percent,
`Soutlum Economic journal, vol. 47 Qanuary 1981 ), pp. 763-775.
`bury, "Advertising, Price Competition and Market Structure,"
`shown through a survey by Alfred Arterburn and john Wood(cid:173)
`
`That price advertising in national magazines is infr~quent is
`
`(August 1986).
`Trade Commission Bureau of Economics working paper no. 141
`any Combination of Pure Monopoly or Competition," Federal
`from a Monopolistically Competitive Model Inconsistent with
`treatment, see Michael Lynch, "The 'Steiner Effect': A Prediction
`in Marketing, vol. 7 (1984), pp. 165-208. For a mathematical
`and "Basic Relationships in Consumer Goods Industries," Research
`Prices?" Journal of Marketing, vol. 37 (October 1973), pp. 19-26;
`
`13. Robert L. Steiner, "Does Advertising Lower Consumer
`Irwin, 1942), pp. 121-123.
`12. Neil H. Borden, Tht EconomiC lijfrcts of Advertising (Chicago:
`Chapters 18-20.
`(Cambridge: Cambridge University Press, 1987), especially
`Hung, The Economics of lmptrjut Competition: A Spatial Approach
`and Melvin L. Greenhut, George Norman, and Chao-shun
`no.! of Political Economy, voi. 91 (December 1983), pp. 979-1000;
`Vany and Thomas R. Saving, "The EconomiC! of Quality," jour(cid:173)
`Economy, val. 80 (May/june 1972), pp. 586-597; ArthurS. De
`Excess Capacity," with a reply by Demsetz,Jouma/ qf Political
`ard Schmalensee, "A Note on Monopolistic Competition and
`nal of Political &onomy, voi. 67 (February 1959), pp. 21-30; Rich(cid:173)
`"The Nature of Equilibrium in Monopolistic Competition," Jour(cid:173)
`of EconomicSJudi'ts, vol. 18 (1950), pp. 1-27; Harold Demsetz,
`Nicholas Kaldor, "The Economic Aspects of Advertising," RBiew
`Press, 1933), Chapter 7. Significant contributions include
`ory qf Monopolistic Competition (Cambridge: Harvard University
`cost function, thereby sacrificing some scale economies. Tht The(cid:173)
`equilibrium on the falling segment of their long-run average total
`differentiation, supported in part by advertising, leads firms into
`
`erature on Edward H. Chamberlin's contention that product
`lit ' There 1s an extensive but ultimately inc-onclusive theoretical
`11ltcatlon ~hile Newsday of Long bland continued to publish.
`:~s~d 1~e three leading New York City newspapers to suspend
`ork, rose relative to those on Long Island when a 1978 strike
`\' la.zer reports that supermarket food prices in Queens, New
`~nomic Inquiry, val. 19 (October 1981), pp. 661-671, Amihai
`In ~Advertising, Information, and Prices-A Case Study,"
`&Momics, vol. 36 (September 1987), pp. 49-60
`petition in Routine Legal Services Markets," jou.TTUll of Industrial
`eter, Scott L. Smith, and Steven R. Cox, "Advertising and Com(cid:173)
`type and magnitude of advertising by attorneys in john R. Schro(cid:173)
`Similar results were obtained with less satisfactory controls for the
`Journal rif Law & Economics, vol. 15 (October 1972), pp. 337-352.
`nham, ''The Effect of Advertising on the Price of Eyeglasses,"
`with similar fmdings for the dispensing of eyeglasses was Lee Be(cid:173)
`$ion staff report (Washington: USGPO, 1980). An earlier study
`tice in the Professions: The Case of Optrmutry, Federal Trade Commis(cid:173)
`Bond et al., Effias qf Restrictions on Advertising and Commercial Prac(cid:173)
`(March 1984), pp. 211-216, extending an analysis by Ronald
`ity of Optometric Services," American Economic RBiew, val. 74
`10. John E. Kwoka,Jr., "Advertising and the Price and Qual(cid:173)
`lated standard deviations.
`the number of quotations appears the denominator of the calcu(cid:173)
`theses are t·ratios. The SQRTNR variable is included because
`of the number of price quotations sought. The values in paren(cid:173)
`branded items were requested, and SQR TNR is the square root
`a dummy variable with value of unity when nationally known
`able for service (as contrasted to goods) quotations, NATBRD is
`age value of the quoted transaction, SERVICE is a dummy vari(cid:173)
`prices to mean reported prices (in percent), VALUE is the aver(cid:173)
`where SIGMA/MEAN is the ratio of the standard deviation of
`
`.224, N -39;
`
`(2.05)
`-8.36 SQRTNR, R' -
`
`(1.92)
`
`(0.68)
`
`-3.78 SERVICE-11.97 NATBRD
`
`(0.60)
`.021 VALUE
`
`-
`
`(3. 73)
`56.3
`
`SIGMA/MEAN -
`
`9. The estimated regression equation was:
`
`nal of Economics, vo1. 93 (May 1979), pp. 206-207.
`•Price Differences in Almost Competitive Markets," Quarter& Jour(cid:173)
`8. John W. Pratt, David A. Wise, and Richard Zeckhauser,
`7. Ibid., p. 223.
`
`tised brands to have higher shelf turnover, and hence to yield more profit per unit
`demonstrated tendency, at least with food store products, for nationally adver(cid:173)
`draws customers who, once attracted, will also buy higher-margin items; and the
`by two other phenomena: the belief by retailers that stocking well-known brands
`by accepting relatively slender price-cost margins. 14 This proclivity is reinforced
`retailer competition, monopolistically competitive retailers maximize their profits
`Facing relatively high elasticity of demand for such products because of the inter~
`it or suffer a loss of customers to competitors who do carry the best-known brands.
`consumers through advertising, the relevant retailers are virtually forced to stock
`75
`
`Product Differentiation, Market Structure, and Competition 5
`
`turers and their retailers.13 When a product appeals directly and successfu y
`fects consumer goods prices by altering the power relationships between rnan~ to
`when it assiduously avoids mentioning prices, national advertising stgmficantlYfac·
`A line of analysis articulated most fully by Robert L. Steiner sug?'es~s that ev:;.
`causal relationship between decreased production costs and adverusmg.
`hensive survey of the evidence that "it is impossible from cost data t~ _trac,~1: clear
`known, compelling us to reiterate Neil Borden's conclusion from an early com pre·
`result generalizes to other trades and to national as well as local markets is un·
`firm advertisers, suggesting that both effects may have been at work. Whether this
`the Federal Trade Commission experiment had slightly lower prices than smal!(cid:173)
`ization of scale economies and hence cost savings. II Large chain optometrists m
`tract more business than would otherwise be possible, thereby facilitating there~­
`price competition among contending suppliers, or by permitting suppliers to at(cid:173)
`
`Local consumer-oriented advertising could lead to lower prices by intensifying
`
`the cities with advertising were served at prices that were lower on average.
`rough, higher-priced service. However, holding quality constant, consumers in
`a choice ~etween less thorough but much less expensive service and more tho(cid:173)
`cantly less thorough examinations. Thus, consumers in cities with advertising had
`their peers in no-advertising cities, while the active advertisers conducted signifi(cid:173)
`ting advertising provided examinations of somewhat higher quality than those of
`than the averages for cities with no advertising. Nonadvertisers in cities permit(cid:173)
`tising, even the prices of nonadvertisers were lower, although only slightly so,
`prices in cities where advertising was prohibited.10 In the cities permitting adver(cid:173)
`dia other than the Yellow Pages were roughly 45 percent lower than comparable
`John K woka found that the examination prices of optometrists advertising in me(cid:173)
`results of an unusually well-controlled Federal Trade Commission experiment,
`from state to state in the extent to which advertising is permitted. Analyzing the
`glasses, since optometrists' and opticians' professional codes of ethics vary widely
`in local markets. The richest evidence on this point exists for the fitting of eye(cid:173)
`that advertising, and especially price advertising, can lead to lower service prices
`Advertising, Price Despite the persistence of substantial price dispersion, there is reason to believe
`
`Levels, and Quality
`
`relationships were not statistically significarit.
`deviation was lower for services than for goods. However, the search and quality
`Contrary to the expectation that quality might vary more widely for services, the
`prices deviated less from their average, the larger the average transaction was:
`known brands than for other items. 9 Consistent with Stigler's search hypothesis
`deviation of prices as a percentage of average prices was smaller for nationally
`120 percent. Our own regression analysis of their data reveals that the standard
`tions. a Maximum quoted prices exceeded minimum quotations by an average of
`dard deviation of quoted prices averaged 21.6 percent of average price quota(cid:173)
`the Boston metropolitan area during 1978. They found that on average, the stan(cid:173)
`dardized consumer goods and services from an average of twelve suppliers each in
`kets. Pratt, Wise, and Zeckhauser obtained price quotations on thirty-nine stan(cid:173)
`tunities for search, substantial price differences persist in consumer goods mar(cid:173)
`the considerable amount of price advertising in local newspapers and the oppor(cid:173)
`fact.that not all consumers read the relevant advertisements.7 However, despite
`economical," and the tendency for price dispersion to vanish is limited only by the
`
`574 Chapter 16
`
`Page 7 of 25
`
`

`

`Journal of Consumer Research, vol. 9 (March 1983), pp. 347-353
`"Quality, Price, Advertising, and Published Quality Ratings,"
`
`22. Robert B. Archibald, C. A. Haulman, and C. E. Moody,
`indicators of value.
`product dimensions (e.g., bulk or price per se) that are imperfect
`drawn by Russell and Thaler is that consumers often focus on
`greatest washing power per ounce and penny. The implication
`ergy efficiencies and the highest-priced dishwashing liquids the
`showing that the highest-priced air conditioners had the best en(cid:173)
`vol. 75 (December 1985), pp. 1078-1080, summarize two studies
`Rationality in Competitive Markets," American Economic Review,
`Thomas Russell and Richard Thaler, "The Rdevance of Quasi
`who obtained similar results in a study of87 Danish products.
`dinavianjournal of Economics, vol. 83, no. 3 (1981), pp. 372-389,
`trial Products: Some Results of an Empirical Investigation, n Scan(cid:173)
`See also Christian Hjorth-Anderson, "Price and Quality oflndus(cid:173)
`1961-1975,"Joumal of Retailing, vol. 54 (Winter 1978), pp. 15-28
`21. Peter C. Riesz, "Price versus Quality in the Marketplace,
`1985), pp. 251-262.
`perfect Information," Review of Economic Studies, vol. 52 (April
`and Alan Schwartz and Louis Wilde, "Product Quality and Im(cid:173)
`Review of Economic Stud~s. vol. 50 (October 1983), pp. 647-658;
`615-641; Asher Wolinsky, "Prices as Signals of Product Quality,"
`formance," Journal of Political Economy, vol. 89 (August 1981), pp.
`Leffler, "The Role of Market Forces in Assuring Contractual Per(cid:173)
`(August 1986), pp. 796-821; Benjamin Klein and Keith B.
`Signals of Product Quality," JourruU. of Political Economy, vol. 94
`20. Paul Milgram and John Roberts, "Price and Advertising
`
`cember 1983), pp. 881-894.
`Search, and Advertising," American Economic Review, vol. 73 (De(cid:173)
`
`19. Steven N. Wiggins and W. J. Lane, "Quality Uncertainty,
`
`port (Washington: April 1986).
`Market, Federal Trade Commission Bureau of Economics staff re(cid:173)
`James M. Lacko, Product Quality and Information in the Used Car
`Economic Review, vol. 74 (September 1984), pp. 798-804; and
`
`D. Pratt and George Hoffer and reply by Bond, Ammcan
`e]vol. 72 (September 1982), pp. 836-840, with comment. by
`
` U
`Wr
`
`....... The Market for Used Pickup Trucks," Amencan Etorwmic
`:::~~a!. See Eric W. Bond, "'A Direct Test of the :Lemons'
`t.ms hypothesis for used truck and car markets have been
`~1, val. 87 (December 1979), pp. 1328-1346. Tests of the
`t '=cry-of Minimum Quality Standards," Jourruzl of Political Econ(cid:173)
`also Hayne E. Leland, "Quacks, Lemons, and Licensing: A
`.,.ly]ournal of Etorwmics, vol. 84 (August 1970), pp. 488-500.
`JOns': Quality Uncertainty and the Market Mechanism,"
`
`lln"tllem formalized by George Akerlof in "The Market for
`
`The paradoxes that arise here are a variant of the "lemons"
`
`'''-450.
`Hgnal," Journal of Political Economy, vol. 92 Uune 1984), pp
`Ill Richard E. Kihlstrom and Michael Riordan, "Advertising As
`• .,.," &lljourruzl of Economics, vol. 13 (Spring 1982), pp. 20-35;
`"1.-~nsumer Information, Product Q!ality, and Seller Reputa-
`.~Ecorwmics, vol. 10 (Autumn 1979), pp. 566-588; Carl Shapiro,
`tising, Consumer Information, and Product Quality," &lljoumal
`pp. 485-503; Yehuda Kotowitz and Frank Mathewson, "Adver·
`Product Quality," Jourruzl of Political Economy, vol. 86 Uune 1978),
`18. See Richard Sclunalensee, "A Model of Advertising and
`ical &onomy, vol. 82 Uuly/August 1974), pp. 729-754.
`17. Phillip Nelson, "Advertising as Information," Jourruzl of Polit(cid:173)
`vol. 49 (May-June 1971), p. 26.
`~usinessmen Look Hard at Advertising," Harvard Business Review,
`Hed to lower prices. Stephen A. Greyser and Bonnie B. Reece,
`lllillance advertising led to higher prices, while 35 percent believed
`~ rcent of them business managers, 49 percent believed that on
`16. In a survey of2,700 Harvard Business Review subscribers, 82
`p. 670
`·udets, see Weiss et al., "The Size of Selling Costs," supra note 3,
`11!Jip may not carry over to products sold in other specialized retail
`,Auburn House, 1983). For statistical evidence that the relation~
`Hidden E.fficts: Manufacturers' Advertising and Retail Pricing (Boston:
`nationally advertised food items, see Mark S. Albion, Advertising's
`15. For new survey evidence that retail margins are lower on
`
`a.
`
`imprint their individual "production marks" on products helped guard against
`economic planners, who found that requiring consumer goods manufacturers to
`tastes. This is a lesson that dawned late but forcefully upon Soviet Union
`repeat purchases manufacturers who achieve high quality, or cater to her special
`be sure w~o made a product, and she would have difficulty rewarding through
`dards. If there were no brand names and trademarks, the consumer might never
`quality and reliability and motivate producers to maintain adequate quality stan(cid:173)
`created through image differentiation can help consumers select products of high
`Other Reputation Whether or not it is related in any close way to advertising levels, the information
`
`Effects
`
`allow advertisers to quote its ratings.
`of objective quality evaluations, Consumer Reports, unlike Runner's World, does not
`generalize to other products, at least in the United States, since the leading source
`lated advertising by the high-quality producers. However, this finding may not
`the availability of an authoritative, "advertisable" mark of superior quality stimu(cid:173)
`
`Product Differentiation, Market Structure, and Competition 577
`
`tions, on the other hand, changed only slightly. The implication appears to
`were published, the advert