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Informative Advertising in Monopolistically Competitive Markets

Creane, Anthony and Manduchi, Agostino (2019): Informative Advertising in Monopolistically Competitive Markets.

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In their seminal paper, Grossman and Shapiro (1984) find that informative advertising is socially excessive in an oligopoly pure-strategy symmetric equilibrium (PSSE). However, their analysis assumed that every consumer receives at least one advertisement. Christou and Vettas (2008) present counter-examples, showing that if this assumption does not hold, the PSSE advertising may, instead, be insufficient. Christou and Vettas (2008) also show by example that quasiconcavity may not hold in Grossman and Shapiro (1984) and that there may be non-existence due to discontinuities from undercutting, although deriving existence conditions (not derived in Grossman and Shapiro (1984)) is infeasible. We revisit the question by modeling firms (like consumers) as a continuum, which mitigates the discontinuity, enables the derivation of intuitive existence conditions for a PSSE, and allows a general analysis including when some consumers receive no advertisements. More importantly, we find that advertising is always socially insufficient and entry is also insufficient.

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