INFORMATIVE ADVERTISING IN MONOPOLISTICALLY COMPETITIVE MARKETS

Creane, Anthony and Manduchi, Agostino (2019): INFORMATIVE ADVERTISING IN MONOPOLISTICALLY COMPETITIVE MARKETS.

Abstract

In their seminal paper Grossman and Shapiro (1984) find that informative advertising is socially excessive in an oligopoly (entry is also socially excessive). However, the analysis assumed that all consumers receive at least one advertisement. Christou and Vettas (2008), among others, present counter-examples in alternative settings, showing when the assumption does not hold, the equilibrium advertising may, instead, be inefficiently low. Christou and Vettas (2008) also show there may be non-existence due to discontinuities from undercutting, 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 mitigates the discontinuity that exists in both papers and allows the general analysis to include the cases when some consumers receive no advertisements. As a result, we are able to derive explicit and intuitive conditions for an equilibrium. More importantly, we find, instead, that advertising is socially insufficient regardless of the fraction of the consumers who receive an ad, including when all consumers receive at least one ad. We also find that there is insufficient entry instead of excess entry. We provide intuition for the difference between our and previous results.

• Item Type: MPRA Paper
• Language: English
• Keywords: Informative advertising, product differentiation, monopolistic competition, welfare.
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility

References

Bagwell, K., 2007. The Economic Analysis of Advertising. Handbook of Industrial Organization 2, Chapter 28, 1701-1844.

Butters, G., 1977. Equilibrium distributions of sales and advertising prices. Review of Economic Studies 44, 465-491.

Christou, C. and N. Vettas, 2008, On informative advertising and product differentiation, International Journal of Industrial Organization, 26, 92-112.

Dixit, A., and J. Stiglitz, 1977, Monopolistic Competition and Optimum Product Diversity, The American Economic Review, 67(3), 297-308.

Fishman, A., Levy, N., 2015. Search Costs and Investment in Quality. Journal of Industrial Economics 63, 625-641.

Grossman, G.M., Shapiro, C., 1984. Informative Advertising with Differentiated Products. Review of Economic Studies, 51, 63-81.

Mankiw, N.G., Whinston, M.D., 1986, Free Entry and Social Inefficiency. RAND Journal of Economics 17, 48-58.

Salop, S.C., 1979. Monopolistic Competition with Outside Goods. Bell Journal of Economics 10, 141-156.

Shapiro, C., 1980, Advertising and Welfare: Comment, The Bell Journal of Economics, 12(2), 749-75 1.

Tirole, J, 1988, The Theory of Industrial Organization, MIT Press: Cambridge, MA.