Market Structure and Buyer Loyalty: A Case Study of the West German Truck Market

Abstract

WHEN examining the effect of product differentiation expenses on market structure, most studies have concentrated on the estimation of the relationship between advertising intensity and seller concentration. While a number of these studies have found a significant positive relationship (see for example, references [i 6], [17, [9]) others have failed to find any meaningful association (examples being [26] and [6]). The existence of such conflicting evidence is not surprising when it is realized that advertising is only one element within a set of product differentiation expenditures. Given the inadequate nature of the available data relating to expenditure on such items as free test samples, free after-sales service, point of sale advertising, packaging quality, styling and salesman intensity, any assumption as to their being complementary with or substitutes for advertising is, for most industries, little more than a guess. Hence, the problem of establishing a direct line of causality from advertising to concentration. This paper attempts an alternative approach to the problem by examining the relationship between seller concentration and the stock of buyer goodwill created over a period of time by total product differentiation expenses. One of the main objectives of these expenditures is to strengthen the brand by raising purchasers' brand loyalty. Thus, the level of brand loyalty can be used as an indicator of the effectiveness of the various product differentiation expenditures. The most successful differentiators will accumulate buyers at a relatively faster rate leading to an increase in concentration. Within the traditional analytical framework of industrial economics we are emphasizing the fundamental importance of a causal relation running from conduct to the basic conditions of demand and then on to market structure. The line of causality between product differentiation policies and market structure is seen to be indirect rather than direct and is dependent on the competing product differentiation strategies having different degrees of success. In the first section of this paper reasons are advanced for the expectation of a relationship between buyer loyalty and both market share and seller concentration. Section II presents the variables used in estimating the