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Informative advertising in differentiated oligopoly markets

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  • Hamilton, Stephen F.

Abstract

This paper examines the welfare implications of informative advertising in differentiated product oligopoly markets. The analysis reconciles the conflicting results in previous studies that find advertising to be undersupplied in homogeneous product markets, but oversupplied in differentiated product markets when the degree of differentiation is "small". In equilibrium, purely informative advertising is undersupplied when brands are sufficiently close substitutes and oversupplied when brands are more differentiated. Product differentiation also has welfare implications for the effect of technological change in the advertising sector. In response to an advertising cost innovation, equilibrium prices fall and the market converges to the socially optimal resource allocation for brands that are sufficiently close substitutes, whereas equilibrium prices rise and divergence occurs when brands are more differentiated.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 27 (2009)
Issue (Month): 1 (January)
Pages: 60-69

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Handle: RePEc:eee:indorg:v:27:y:2009:i:1:p:60-69

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Oligopoly Product differentiation Informative advertising;

References

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  8. David A. Soberman, 2004. "Research Note: Additional Learning and Implications on the Role of Informative Advertising," Management Science, INFORMS, vol. 50(12), pages 1744-1750, December.
  9. Carl Shapiro, 1980. "Advertising and Welfare: Comment," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 749-752, Autumn.
  10. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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  14. Lancaster, Kelvin, 1975. "Socially Optimal Product Differentiation," American Economic Review, American Economic Association, vol. 65(4), pages 567-85, September.
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Cited by:
  1. Bing Han & Hayley Chouinard, 2013. "Product Quality, Advertising Intensity and Market Size," Working Papers 2013-12, School of Economic Sciences, Washington State University.
  2. Roig, Guillem, 2014. "Informative Advertisement of Partial Compatible Products," TSE Working Papers 14-483, Toulouse School of Economics (TSE).
  3. Maria Alipranti & Evangelos Mitrokostas & Emmanuel Petrakis, 2013. "Comparative versus Informative Advertising in Oligopolistic Markets," Working Papers 1301, University of Crete, Department of Economics.
  4. Agostino Manduchi, 2013. "Non-neutral information costs with match-value uncertainty," Journal of Economics, Springer, vol. 109(1), pages 1-25, May.
  5. Jianqiang Zhang & Weijun Zhong & Shue Mei, 2012. "Competitive effects of informative advertising in distribution channels," Marketing Letters, Springer, vol. 23(3), pages 561-584, September.

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