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Estimated Weighted Least Squares

Analyzing equity profits in 57 large advertising-intensive firms during 1963-1968. Factors include market concentration, advertising-to-sales ratios, and firm sizes. Results suggest higher profits in concentrated markets with heavy advertising.

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Estimated Weighted Least Squares

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  1. Estimated Weighted Least Squares Profits and Market Structure for Highly Advertising Companies J.M. Vernon and R.E.M. Nourse (1973). “Profit Rates and Market Structure of Advertising Intensive Firms,” The Journal of Industrial Economics, Vol. 22, #1, pp. 1-20

  2. Data Description • n = 57 Large Advertising Intensive Firms • Dependent Variable: Equity Profit (PE) (net income/shareholder equity) averaged over 1963-1968 • Independent Variables (Subset of the original paper’s): • DCR = 1 if firm’s average market Concentration Ratio ≥ 50, 0 otherwise (1  firm is in highly concentrated product areas) • AS = Average INDUSTRY Advertising/Sales Ratio • CAS = FIRM Advertising/Sales Ratio • LRSIZ = 1/ln(ASSETS) • SIZ = ASSETS (Used to estimate variance heterogeneity) • Heterogeneity Model (Larger firms ≈ many small firms):

  3. Data

  4. Ordinary Least Squares Regression and Correlations While not all regression coefficients are significant, there is evidence that profits are higher for firms in highly concentrated markets, with high industry and firm advertising, and higher assets. (Barriers of entry)

  5. Estimated Heterogeneity Model and Firm Variances

  6. Estimated Weighted Least Squares Estimator

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