Advertising and Cost Reduction
AbstractThe empirical literature on internalization has found a positive relationship between advertising intensity and foreign direct investment. The model presented in this paper explains this evidence by a technological change in the communications environment and makes predictions for other cost-reducing investments. We consider a market in which a single producer launches a new product. At first potential buyers are unaware of the product and its price, and the producer decides the optimal advertising strategy. We find that both advertising spending and investment in per unit cost reduction are higher under targeting than under mass advertising when the advertising technology exhibits marginal economies of targeting.
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Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 177.
Date of creation: 01 May 2007
Date of revision:
Informative advertising; Targeting; Foreign Direct Investment; Cost reduction;
Other versions of this item:
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-12 (All new papers)
- NEP-MIC-2007-05-12 (Microeconomics)
- NEP-MKT-2007-05-12 (Marketing)
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