The advertising reaction of incumbents to the arrival of craft brewers into the American beer market is investigated in this article. Using geographic diversity across TV markets and changes in local beer laws, I show two facts: mass-producing brewers respond by increasing local advertising, hence lowering consumers' price sensitivity. I then consider the effects on
market power using a structural model with strong advertising. The empirical model shows that mass-producing brewers did in fact have an economic incentive to respond to entrance by increasing advertising. Moreover, the empirical findings show that (i) own and competing advertising can lower price sensitivity; (ii) markups for flagship domestic brands raised from
and (iii) roughly 20% of the rising mark-ups can be ascribed to the observed growth in advertising stock.Because of its possible contribution to the development of competitive markets, market entrance has attracted much scholarly and policy discussion. In many concentrated markets, incumbents react to the entrance of new competition not only by
Altering the prices of existing Although
many businesses view advertising as a fundamental strategic choice, little empirical research has been done on the advertising reaction to entrance. Therefore, even if the consequences of other non-pricing responses are well understood, less is known about the impact of advertising response, for example, on customers. This work tries to close this discrepancy.
Specifically, in considering the U.S. beer market, I look at whether incumbents change their advertising decisions in reaction to market entry Over the past twenty years, t beers.4. Given the size and recent fast increase in advertising expenses among American corporations (Bronnenberg et al., 2022b), including the biggest brewers, it is interesting to investigate the
degree to which these mass-producing brewers responded in TV advertising to the entrance of craft breweries.The five This work aims mostly at this goal. Considering the possible financial consequences of such an advertising reaction, if any, the study becomes much more important. For example, advertising-driven tastes could alter consumers' price sensitivity,
Therefore enabling the increase of market power
Using data on the U.S. beer sector for 2010–2016, I first examine the TV advertising response to craft entrance and its effects on market power in three steps. First, I do a reduced form study to analyze the impact of advertising on demand and to determine how entrance might affect advertising. More precisely, I find the effect of local market entry on TV advertising by using variance between U.S. states in the cumulative number of fixed cost-related beer
restrictions. Gross Rating Points (GRPs), a common statistic in the marketing literature measuring ad efficacy, are the main indicator of advertising. Then by using spatial discontinuities in advertising along the borders of TV markets, I investigate the possible effects of advertising on demand, particularly on price sensitivity In the second stage, I project
a differentiated product demand model whereby advertising not only modulates demand but also influences customer response to price adjustments. Along with recorded values of pertinent state variables, I explore an oligopoly scenario and utilize stationary pricing first-order conditions instead of modelling the dynamic game involving advertising and market
Entry decisions to find marginal costs and do
counterfactual analysis. In the third phase, I evaluate whether mass-producing brewers had the incentive to react in advertising in reaction to craft competition by computing the counterfactual profit incentives under different entrance and advertising decisions. I then investigate the effects of advertising on market power by keeping advertising constant to
different observed levels (e.g., pre-entry levels) and computing the related price equilibrium.
Craft brewers have entered the U.S. beer market in unheard-of numbers. There were 1,485 craft producers by 2003; this figure rose to 3,162 in 2013 and 9,709 in 2022.One Because of the degree of variation in beer styles and the clear disparities in selling prices, this new craft beer movement was not considered as a direct threat by mass-producing brewers for many
years. Changing consumer tastes, driven mostly by demographic changes, have indicated, however, that the competitive pressure resulting from the craft category is not a limited but rather a growing one (Bronnenberg et al., 2022a). Whereas the craft segment share has grown by roughly 10 percentage points from 2003 to 2021, national and local market shares
Conclusion
have consistently dropped for the largest domestic brewers.Twice Given that the overall amount of beer sold has been rather steady or perhaps slightly declining (Beer Institute, this change in market shares is especially remarkable. The mass-producing brewers have taken several steps to impede, or even try to undo, the rise of independent craft brews. Academic study and industry studies have thoroughly recorded and examined some measures like the
purchase of craft breweries, the development of in-house craft brands, and the application of distribution incentive plans.In three Given the long-standing significance that advertising has had in the growth of the U.S. beer industry, it is remarkable that the literature has mostly neglected the role of advertising in the last decades, in particular the response in TV advertising efforts to the rise of craft industry.explore an oligopoly scenario and utilize
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