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Quality Sorting and Networking: Evidence from the Advertising Agency Industry

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Author Info
Mohammad Arzaghi

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Abstract

This paper provides a model of knowledge sharing and networking among single unit advertising agencies and investigates the implications of this model in the presence of heterogeneity in agencies’ quality. In a stylized screening model, we show that, under a modest set of assumptions, the separation outcome is a Pareto-undominated Nash equilibrium. That is, high quality agencies locate themselves in a high wage and rent area to sift out low quality agencies and guarantee their network quality. We identify a necessary condition for the separating equilibrium to exist and to reject the pooling equilibrium even in the presence of agglomeration economies from networking. We derive the maximum profit of an agency and show the condition has a directly testable implication in the empirical specification of the agency’s profit function. We use a sample of movers—existing agencies that relocate among urban areas—in order to extract a predetermined measure of their quality prior to relocation. We estimate the parameters of the profit function, using the Census confidential establishment-level data, and show that the necessary condition for separation is met and that there is strong separation and sorting on quality among agencies in their location decisions.

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File URL: http://www.ces.census.gov/index.php/ces/cespapers?down_key=101726
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File Function: First version, 2005
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Publisher Info
Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 05-16.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 39 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:cen:wpaper:05-16

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Web page: http://www.ces.census.gov

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Related research
Keywords: Advertising; Agglomeration; Industrial Concentration; Business Services; Discrete Choice; Knowledge Spillovers; Learning; Location Decision; Poisson Regression; Nested Logit; Screening; Separating Equilibrium; Sorting;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services
M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising
R12 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
R30 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - General

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. J. Vernon Henderson & Mohammad Arzaghi, 2005. "Networking Off Madison Avenue," Working Papers 05-15, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
    Other versions:
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