Endogenous sunk costs and the geographic differences in the market structures of CPG categories

Abstract

We describe the industrial market structure of CPG categories. The analysis uses a unique database spanning 31 consumer package goods (CPG) categories, 39 months, and the 50 largest US metropolitan markets. We organize our description of market structure around the notion that firms can improve brand perceptions through advertising investments, as in Sutton’s endogenous sunk cost theory. The richness of our data allow us to go beyond Sutton’s bounds test and to study the underlying forces bounding concentration away from zero. Observed advertising levels escalate in larger US markets. At the same time, the number of advertised brands in an industry appears to be invariant to market size. Therefore, the size-distribution of brands across markets is characterized by bigger (i.e. more heavily advertised) as opposed to more brands in larger markets. Correspondingly, observed concentration levels in advertising-intensive industries are bounded away from zero irrespective of market size.

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