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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.

Suggested Citation

  • Hamilton, Stephen F., 2009. "Informative advertising in differentiated oligopoly markets," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 60-69, January.
  • Handle: RePEc:eee:indorg:v:27:y:2009:i:1:p:60-69
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Han, Bing & Chouinard, Hayley H., 2014. "Product quality, advertising intensity and market size," Economics Letters, Elsevier, vol. 124(2), pages 215-218.
    3. Zhang, Jianqiang & Liang, Qi & Huang, Jian, 2016. "Forward advertising: A competitive analysis of new product preannouncement," Information Economics and Policy, Elsevier, vol. 37(C), pages 3-12.
    4. Guillem Roig, 2017. "Product Compatibility as an Strategy to Hinder Entry Deterrence," DOCUMENTOS DE TRABAJO 015773, UNIVERSIDAD DEL ROSARIO.
    5. Chen, Jihui & Waters, George, 2017. "Firm efficiency, advertising and profitability: Theory and evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 240-248.
    6. Guillem Roig, 2017. "Product Compatibility as an Strategy to Hinder Entry Deterrence," DOCUMENTOS DE TRABAJO 015774, UNIVERSIDAD DEL ROSARIO.
    7. Agostino Manduchi, 2013. "Non-neutral information costs with match-value uncertainty," Journal of Economics, Springer, vol. 109(1), pages 1-25, May.
    8. Maria Alipranti & Evangelos Mitrokostas & Emmanuel Petrakis, 2013. "Comparative versus Informative Advertising in Oligopolistic Markets," Working Papers 1301, University of Crete, Department of Economics.

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