Advertising and Market Structure : A Study of the Norwegian Laundry Detergent Market

Abstract

The Norwegian laundry detergent market is highly concentrated. Throughout the history of industry, Lilleborg, has had an almost monopolistic position in the market with only a few competitors, and none of comparable size. This thesis takes us through the history of the Norwegian market from the birth of the Norwegian soap industry by Akerselva in Oslo, through a resigning prime minister, a detergent war, and environmental concerns ending up in the modern detergent industry. Through World War, attempted entry and environmental changes, the market leader remains the number one producer of laundry detergent in Norway.

Based on the history of the industry, the developments of market structure, and entry and exit in the Norwegian laundry detergent industry is analyzed using a foundation based on economic theory. The theories introduced describe the industry life cycle as well as how advertising, an important part of the laundry detergent market, affects structure. In addition, theory describing how a firm may act strategically to maintain a dominant market position is introduced. Analysis of the Norwegian detergent market is fundamentally based on the industry life cycle, and how market structure has developed over time. In its infancy, the soap and detergent industry had several large local producers. As time passed, more and more of the local producers dropped out of the market. After the industry matured, entry became more costly. Increasing entry costs meant few companies succeeded in entering the Norwegian detergent market after maturity.

This thesis analyzes when the industry developed into a mature state, and how industry maturity affected entry. The effect of maturity on entry is largely analyzed through how effective advertising was in breaking down brand loyalty. Because brand quality is important in determining how effective advertising is, this thesis will attempt to explain how an incumbent may increase the cost of entry by making sure brand quality is similar or superior to potential entrant brands.

The result of the analysis provided is that current market structure in detergent markets today is mostly the same as in the late 1930s. The explanation underlying this result is that the detergent industry at this point was maturing, and entry by new firms proved costly. In most cases this high cost of entry has been effective in deterring new entrants, and hence market structure has remained largely unchanged for the majority of the last 70 years.