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Informative advertising in monopolistically competitive market
University of Kentucky.
Jönköping University, Jönköping International Business School, JIBS, Economics. Jönköping University, Jönköping International Business School, JIBS, Media, Management and Transformation Centre (MMTC).
(English)Manuscript (preprint) (Other academic)
Abstract [en]

In their seminal paper Grossman and Shapiro (1984) find that informative advertising is socially excessive in an oligopoly (entry is also socially excessive). However, to derive the results, it was assumed that all consumers receive at least one ad, i.e., advertising does not have a demand creation effect. Christou and Vettas (2008), Tirole (1988), among others, have presented counter-examples in alternative settings, showing when the assumption does not hold, advertising may socially advertising. Christou and Vettas (2008) also show that quasiconcavity may not hold and present examples in which the equilibrium does not exist as firms would deviate to a higher price. We revisit the question by modeling firms (like consumers) as a continuum, which eliminates the discontinuity that bedeviled both papers and allows us to not use the assumption that all consumers receive at least one ad. As a result, we are able to derive explicit and intuitive conditions for an equilibrium. More importantly, we find instead advertising is socially insufficient regardless of the fraction of the consumers who receive an ad, including when there is effectively no demand creation. We also find that there is insufficient entry instead of excess entry. We provide intuition for the difference between our and previous results, which partly turns on firms deviating to a lower (supercompetitive) price.

Keywords [en]
informative advertising, product differentiation, monopolistic competition, welfare
National Category
Economics
Identifiers
URN: urn:nbn:se:hj:diva-42611DOI: 10.2139/ssrn.3290612OAI: oai:DiVA.org:hj-42611DiVA, id: diva2:1278089
Available from: 2019-01-11 Created: 2019-01-11 Last updated: 2019-01-11Bibliographically approved

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Manduchi, Agostino

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CiteExportLink to record
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Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf