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Advertising and Cost Reduction

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  • Immordino Giovanni

    ()
    (Università di Salerno and CSEF)

Abstract

Consider a Cournot oligopoly where producers launch new products. At first potential buyers are unaware of the product, and firms decide on levels of production, advertising expenditure and a cost-reducing investment. We find the conditions for complementarities among scale, advertising and innovation strategies to arise. In a duopoly with substitute products all variables are higher for the firm that moves from mass advertising to targeted advertising but decrease for the other. In an oligopoly with complementary products all variables are higher for all firms when they shift away from mass marketing. We conclude by linking our results to the empirical literature on internalization which finds a positive relationship between advertising intensity and foreign direct investment.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 9 (2009)
Issue (Month): 1 (April)
Pages: 1-15

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Handle: RePEc:bpj:bejtec:v:9:y:2009:i:1:n:10

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  1. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
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  12. Grubaugh, Stephen G, 1987. "Determinants of Direct Foreign Investment," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 149-52, February.
  13. Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-23, March.
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  15. Lola Esteban & Jose M. Hernandez & Jose Luis Moraga-Gonzalez, 2001. "Customer Directed Advertising and Product Quality," Tinbergen Institute Discussion Papers 01-099/1, Tinbergen Institute.
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