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Advertising and endogenous exit in a differentiated duopoly

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Author Info
Andrea Mantovani
Giordano Mion

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Abstract

In this paper we consider a two-stage duopoly game where firms first decide whether to invest in advertising and then compete in prices. Advertising has two effects : a market enlargement for both firms and a predatory gain for the investing firm only. Both symmetric and asymmetric equilibria may arise. The two most interesting cases are a coordination game where both firms investing and non-investing are equilibria, and a chicken game where only one firm invests while the other is possibly driven (endogenously) out of the market. Our results suggest that product differentiation has an ambiguous impact on investment in advertising and that strong product substitutability may induce a coordination problem.

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Publisher Info
Article provided by De Boeck Université in its journal Recherches économiques de Louvain.

Volume (Year): 72 (2006)
Issue (Month): 1 ()
Pages: 19-48
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Handle: RePEc:cai:reldbu:rel_721_0019

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Related research
Keywords: advertising; product differentiation; endogenous exit; asymmetric equilibria; coordination games;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ishigaki, Hiroaki, 2000. "Informative advertising and entry deterrence: a Bertrand model," Economics Letters, Elsevier, vol. 67(3), pages 337-343, June. [Downloadable!] (restricted)
  2. Kyle Bagwell & Garey Ramey, 1988. "Advertising and Limit Pricing," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 59-71, Spring. [Downloadable!] (restricted)
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  3. Claudio A. Piga, 1998. "A Dynamic Model of Advertising and Product Differentiation," Review of Industrial Organization, Springer, vol. 13(5), pages 509-522, October. [Downloadable!]
  4. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 63-81, January. [Downloadable!] (restricted)
  5. Nils-Henrik M. von der Fehr & Kristin Stevik, 1998. "Persuasive Advertising and Product Differentiation," Southern Economic Journal, Southern Economic Association, vol. 65(1), pages 113-126, July.
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  6. Demsetz, Harold, 1979. "Accounting for Advertising as a Barrier to Entry," Journal of Business, University of Chicago Press, vol. 52(3), pages 345-60, July. [Downloadable!] (restricted)
  7. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August. [Downloadable!] (restricted)
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  8. James W. Friedman, 1983. "Advertising and Oligopolistic Equilibrium," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 464-473, Autumn. [Downloadable!] (restricted)
  9. Bagwell, Kyle & Ramey, Garey, 1990. "Advertising and pricing to deter or accommodate entry when demand is unknown," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 93-113. [Downloadable!] (restricted)
  10. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug.. [Downloadable!] (restricted)
  11. R. Cellini & L. Lambertini, 2002. "Advertising with Spillover Effects in a Differential Oligopoly Game With Differentiated Goods," Working Papers 430, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
  12. Avinash Dixit & Victor Norman, 1978. "Advertising and Welfare," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 1-17, Spring. [Downloadable!] (restricted)
  13. Schmalensee, Richard, 1983. "Advertising and Entry Deterrence: An Exploratory Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 636-53, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ma, Jie & Ulph, Alistair, 2003. "Advertising in a Differentiated Duopoly and Its Policy Implications for an Open Economy," Discussion Paper Series In Economics And Econometrics 0406, Economics Division, School of Social Sciences, University of Southampton. [Downloadable!]
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