The Effect of Retail Competition on Relationship-Specific Investments: Evidence from New Car Advertising

33 Pages Posted: 23 Nov 2016 Last revised: 24 Jan 2017

See all articles by Charles Murry

Charles Murry

Boston College - Department of Economics

Date Written: December 2, 2016

Abstract

Longstanding state regulations restrict car manufacturers from terminating relationships with dealers, creating differences in retail competition across brands and markets. I use this variation to identify the causal effect of dealer competition on dealer and manufacturer advertising. I find that greater intra-brand dealer competition is associated with lower dealer advertising and greater local advertising by manufacturers. The results are evidence that manufacturers can encourage retail relationship-specific investments by providing downstream market power. Additionally, the results provide novel evidence on the substitution of selling effort within vertical relationships and the optimal design of retail networks. I discuss the relevance of these findings to the effects of state automobile franchise regulation and the recent financial troubles of US car manufacturers.

Keywords: advertising, franchise regulation, automobiles, financial crisis

JEL Classification: L22, L51, M37

Suggested Citation

Murry, Charles, The Effect of Retail Competition on Relationship-Specific Investments: Evidence from New Car Advertising (December 2, 2016). Available at SSRN: https://ssrn.com/abstract=2873516 or http://dx.doi.org/10.2139/ssrn.2873516

Charles Murry (Contact Author)

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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