Abstract
A RECENT article in this Journal presents new evidence that allegedly supports the view that 'the degree of product differentiation will be positively associated with seller concentration'.2 The degree of product differentiation is measured by the ratio of advertising outlays to sales and seller concentration is measured by the ratio of sales of the four leading firms to total sales of the industry. It is claimed that this new evidence directly refutes my earlier work, which found little if any relation between concentration and advertising intensity.3 The new 'evidence' is nothing more than a badly biased sample which seriously distorts the true state of affairs. In fact, when properly corrected, the new evidence, far from overturning my previous findings, lends them strong additional confirmation. I shall show how the impressive correlation between advertising intensity and concentration falls from o.6 to virtually zero when the hypothesis is tested fairly and, moreover, the initial positive association turns into an insignificant negative association. Since I have dealt with the economic issues elsewhere, I shall confine this note to a sequence of statistical tests which clearly establish the misleading nature of the new 'evidence' presented by my critics. The critics claim that my failure to find a strong positive correlation between advertising intensity and concentration is due to the presence of excessive measurement error in the concentration figures brought about by the use of 3-digit instead of 4-digit groupings. Thus the 3-digit concentration figures are weighted averages of their 4-digit components. If the advertising intensity varies within the 4digit components of the 3-digit class, then, it is claimed, the result is a downward biased estimate of the true positive association between concentration and advertising intensity. Hence to overcome these difficulties it is proposed to use data by 4-digit industry classes. The advertising outlays are estimated from published trade sources
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