Informative Advertising in Concentrated, Differentiated Markets

I examine the welfare implications of informative advertising in a differentiated product duopoly market. The analysis reconciles the apparently conflicting results in previous studies that find advertising to be undersupplied in homogeneous product markets and in differentiated markets with a limited number of firms, but oversupplied in differentiated markets with a large number of firms. In equilibrium, purely informative advertising is always overprovided when the degree of product differentiation exceeds a threshold level. The result is robust and obtains under conditions of both price and quantity competition. Product differentiation also has welfare implications for the effect of technological change in the advertising sector. In response to an advertising cost innovation (e.g., through the emergence of cable TV and internet media), the equilibrium prices and advertising levels converge to the social optimum when the products are sufficiently non-differentiated, whereas divergence occurs for more differentiated goods

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 Record created 2017-04-01, last modified 2020-10-28

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