Advertising, Entry Deterrence, and Industry Innovation
AbstractThis paper studies how advertising influences firms’ incentives to invest in R&D. The link between advertising and industry innovation is important, not only because advertising can spur R&D by spreading product knowledge, but also because advertising can discourage new innovative firms from entering the industry. This paper finds that a worse advertising technology can result in local improvements in industry innovation rates. Globally, however, a complete ban on advertising always reduce industry growth. This result is significant because industry advertising spending is quantitatively significant and there are potential connections between public policy towards advertising and R&D. This paper presents a variant of the Grossman and Helpman (1991) quality ladder model. The key difference is that the model in this paper allows advertising to gradually spread product awareness among consumers. This model differs from the entry deterrence literature by assuming perfect price discrimination. Technically, this assumption allows a fully tractable model and analytical characterization of a stationary equilibrium in a dynamic setting, which is not previously available. In terms of economic analysis, this assumption eliminates the extra profit incentives for new firms to enter early, and makes incumbent firms more inclined to use advertising as a deterrent.
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Bibliographic InfoPaper provided by University of Minnesota, Department of Economics in its series Working Papers with number 2008-1.
Length: 40 pages
Date of creation: 03 2008
Date of revision: 03 2008
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Postal: 4-101 Hanson Hall, 1925 Fourth Street South, Minneapolis, MN 55455
Web page: http://www.econ.umn.edu/
More information through EDIRC
Advertising; Entry Deterrence; Innovation;
Find related papers by JEL classification:
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
- M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-04-29 (All new papers)
- NEP-INO-2008-04-29 (Innovation)
- NEP-MKT-2008-04-29 (Marketing)
- NEP-TID-2008-04-29 (Technology & Industrial Dynamics)
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.:
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