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Advertising and endogenous exit in a differentiated duopoly

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Author Info
MANTOVANI, Andrea
MION, Giordano

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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
Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2003023.

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Date of creation: 01 Mar 2003
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Handle: RePEc:cor:louvco:2003023

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

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising

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. Von der Fehr, N.H.M. & Stevik, K., 1996. "Persuasive Advertising and Product Differentiation," Memorandum 01/1996, Oslo University, Department of Economics.
    Other versions:
  2. 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)
    Other versions:
  3. James W. Friedman, 1983. "Advertising and Oligopolistic Equilibrium," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 464-473, Autumn. [Downloadable!] (restricted)
  4. 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)
  5. Ishigaki, Hiroaki, 2000. "Informative advertising and entry deterrence: a Bertrand model," Economics Letters, Elsevier, vol. 67(3), pages 337-343, June. [Downloadable!] (restricted)
  6. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug.. [Downloadable!] (restricted)
  7. 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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  8. 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!]
  9. 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)
  10. 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)
  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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