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Advertising and Cost Reduction

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Abstract

The 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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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 177.

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Date of creation: 01 May 2007
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Handle: RePEc:sef:csefwp:177

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Keywords: Informative advertising; Targeting; Foreign Direct Investment; Cost reduction;

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  1. Hernandez-Garcia, Jose M., 1997. "Informative advertising, imperfect targeting and welfare," Economics Letters, Elsevier, vol. 55(1), pages 131-137, August.
  2. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
  3. Esteban, Lola & Gil, Agustin & Hernandez, Jose M, 2001. "Informative Advertising and Optimal Targeting in a Monopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 49(2), pages 161-80, June.
  4. Morck, Randall & Yeung, Bernard, 1992. "Internalization : An event study test," Journal of International Economics, Elsevier, vol. 33(1-2), pages 41-56, August.
  5. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  6. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-86, May.
  7. Grubaugh, Stephen G, 1987. "Determinants of Direct Foreign Investment," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 149-52, February.
  8. Caves, Richard E, 1971. "International Corporations: The Industrial Economics of Foreign Investment," Economica, London School of Economics and Political Science, vol. 38(149), pages 1-27, February.
  9. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  10. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October.
  11. Morck, Randall & Yeung, Bernard, 1991. "Why Investors Value Multinationality," The Journal of Business, University of Chicago Press, vol. 64(2), pages 165-87, April.
  12. Dunning, John H, 1973. "The Determinants of International Production," Oxford Economic Papers, Oxford University Press, vol. 25(3), pages 289-336, November.
  13. repec:fth:michin:282 is not listed on IDEAS
  14. Bester, Helmut & Petrakis, Emmanuel, 1996. "Coupons and oligopolistic price discrimination," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 227-242.
  15. Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-23, March.
  16. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  17. Lola Esteban & Jose M. Hernandez & Jose Luis Moraga-Gonzalez, 2001. "Customer Directed Advertising and Product Quality," Tinbergen Institute Discussion Papers 01-099/1, Tinbergen Institute.
  18. Alan Rugman, 1980. "Internalization as a general theory of foreign direct investment: A re-appraisal of the literature," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 116(2), pages 365-379, June.
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