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Style over substance? Advertising, innovation, and endogenous market structure

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  • Cavenaile, Laurent
  • Celik, Murat Alp
  • Roldan-Blanco, Pau
  • Tian, Xu

Abstract

While firms use both innovation and advertising to boost profits, markups, and market shares, their broader social implications vary substantially. We study their interaction and analyze their implications for competition, industry dynamics, growth, and welfare. We develop an oligopolistic general-equilibrium growth model with firm heterogeneity. Market structure is endogenous, and firms’ production, innovation, and advertising decisions interact strategically. We find advertising reduces static misallocation, but also depresses growth through a substitution effect with R&D. Although advertising is found to be socially useful, taxing it could simultaneously increase dynamic efficiency, contain excessive advertising spending, and raise revenue, while still reducing misallocation.

Suggested Citation

  • Cavenaile, Laurent & Celik, Murat Alp & Roldan-Blanco, Pau & Tian, Xu, 2025. "Style over substance? Advertising, innovation, and endogenous market structure," Journal of Monetary Economics, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:moneco:v:149:y:2025:i:c:s0304393224001363
    DOI: 10.1016/j.jmoneco.2024.103683
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    More about this item

    Keywords

    Innovation; Advertising; Markups; Growth; Industry dynamics; Misallocation; Business dynamism;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • M30 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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