This analysis tests the free-rider hypothesis as it applies to the Sealy mattress licensing system, one of the oldest and most prominent examples of vertical and horizontal distribution restraints. The results reported here focus on the period following the elimination of Sealy's territorial restraints in 1980. Using alternative samples, units of measurement, and estimating techniques, the analyses yield consistent results supporting the market power hypothesis: the Sealy territorial restraints on distribution decreased output and increased prices. Copyright 1991 by MIT Press.

T HERE is increasing evidence that advertising plays an especially prominent role in structural change.' Mueller and Hamm (1974) found that between 1947 and 1970 concentration was increasing the most in industries characterized by a high degree of product differentiation. In reworking the Mueller-Hamm study because he felt that their model suffered from regression bias, Wright (1978) substantiated the Mueller-Hamm conclusions. Ornstein and Lustgarten (1978) found changes in industry advertising-to-sales ratios to be a significant positive variable in a model that explains changing industry concentration, although they are quite cautious in interpreting their findings. Here we add to previous work by reporting the major results from an analysis of changes in industry concentration based on a sample of 167 four-digit Standard Industrial Classification (SIC) industries for which comparable data were available for the period 1947 to 1972.2 Starting with a slightly modified Mueller-Hamm model we extend the analysis by replacing the dummy variable classification scheme for the degree of product differentiation developed by Parker (1967) with a continuous measure of advertising intensity.3 We then differentiate between television and other types of media advertising.

ECONOMISTS have been alternately fascinated and frustrated with industry or market concentration ratios ever since they were first calculated from census data for the Temporary National Economic Committee for 1937. They are fascinated because concentration ratios are the single best available index of the degree of oligopoly. The frustration stems from the absence of precise coincidence between the Standard Industrial Classification System (SIC) used by the Bureau of the Census and economically relevant markets. Yet, when all is said and done, most industrial organization economists agree that concentration ratios based on SIC industries not only are the best available, but provide useful measures of one dimension of the extent of oligopoly in American industry.1 This is not to imply, of course, that market concentration is the only index of oligopoly or market power. Economic theory suggests and empirical studies verify that entry barriers, product differentiation, firm conglomeration, among others, also may influence firm conduct and industrial performance. But changes in industrial concentration are uniquely significant because often they reflect, at least partially, changes in other structural variables as well. For example, if entry barriers are declining, because of growing markets or whatever, this tends to become reflected in lower concentration ratios. Hence changes in market concentration may also reflect what is happening to other structural variables affecting the discretionary power of sellers. We shall not here argue the question of whether or not concentration ratios are meaningful indices of market structure or whether they are causally related to industrial performance. Those assuming that the answer to both questions is yes, gain aid and comfort from the most comprehensive review of the empirical evidence on the subject.2

Great Lakes ports which showed a large gain2 between I958 and I959. That increase, amounting to 214 million tons, was probably caused by diversion from the Gulf and Atlantic coast ports, as well as by creation of some new trade. Since the export volume handled by North Atlantic ports declined by I4 million tons between the two years, only 10I5 per cent of that decline can be attributed to diversion caused by the Seaway. The drop of imports arriving through North Atlantic ports was also concentrated in a few commodities. A major decline was registered in the import of fuel oil and petroleum products. While the reasons for this cut are difficult to determine, they could not have been related to the since these products are not arriving in large quantities through Great Lakes ports. Second, there was a substantial decline in the volume of iron ore and manganese entering through Virginia and Maryland ports. While this is attributed mainly to the steel strike, it may have been partly due to diversion of source (i.e. the development of Canadian ore) made possible by the Seaway. In summary it can be concluded that only a small part of decline in traffic volume handled by North Atlantic ports in I959 was a result of inroads made by the St. Lawrence Seaway. This conclusion is based on commodity statistics reported by individual ports, but must be regarded essentially as an informed judgment. Furthermore, it relates only to the first season of the Seaway's operations and cannot be extrapolated into the future without important qualifications. On the one hand, the Seaway's traffic may grow in future seasons as facilities in the Middle West are improved and more experience is gathered. On the other hand, there are some indications that conditions may prove unfavorable to future expansion of the Seaway traffic. First, operations of the new waterway have been beset by labor disputes. Second, competition from railroads is being intensified. The fact that an eastbound ship plying the Seaway needs about i o days to get through the Great Lakes compared to a two-day railroad trip between the Middle West and the eastern seaboard certainly helps that competition. Finally, many Great Lakes ports are inadequate to service ships carrying full loads.3 All these factors will no doubt affect the future operation of the Seaway. 2 See U.S. Department of Commerce, United States Waterborne Foreign Commerce, A Review of I959 (Washington, I960), Table Q. ' For fuller discussion of these points see Struggling Seaway, Wall Street Journal, May 6, I960.