Advertising, Market Concentration, and Firm Performance on the Distribution System

Abstract

This paper examines the impact of advertising on the firm performance as measured two profit variables and market structure as measured by market concentrations and the relationship is analyzed by two different distribution systems: independent agency writers vs. direct writers. The empirical testing results show that a positive and non-significant relationship between concentration and advertising for both distribution systems, while a negative and significant relation between market share and advertising is found. These results are consistent with the two distribution systems. This paper, however, finds differences between the two distribution systems in the profit model. A negative and significant relationship is found between advertising and profits for independent agency writers, while there exists no significant relationship for direct writers. So, in this highly competitive market, advertising does not boost profit for independent agency writers.

Keywords: Advertising, Market Structure, Firm Performance, Insurance Distribution System

JEL Classification: G14, G22, L11, L16