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The Advertising-price Relationship: Theory and Evidence

Author

Listed:
  • Natsuko Iwasaki
  • Yasushi Kudo
  • Carol Horton Tremblay
  • Victor Tremblay

Abstract

The relationship between advertising and price is important because the welfare effect of advertising depends upon the price effect of advertising. We attempt to provide a better understanding of the theoretical relationship between advertising and price. We establish theoretical conditions sufficient for advertising to raise prices. This will occur, for example, when firms play a supermodular game - a structure that considers the type of advertising (i.e., persuasive, image creating, or informative) and the effect that advertising has on a firm's demand and costs. We also compare results from two simple duopoly models, one with horizontal and the other with vertical differentiation, and find that only the model with horizontal differentiation is supermodular for the forms of advertising that are thought to raise price (e.g., persuasive advertising). In consideration of these theoretical issues, we then develop an empirical model to determine whether advertising raises prices in the US brewing and cigarette industries.

Suggested Citation

  • Natsuko Iwasaki & Yasushi Kudo & Carol Horton Tremblay & Victor Tremblay, 2008. "The Advertising-price Relationship: Theory and Evidence," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 15(2), pages 149-167.
  • Handle: RePEc:taf:ijecbs:v:15:y:2008:i:2:p:149-167
    DOI: 10.1080/13571510802134213
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    References listed on IDEAS

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    1. Victor J. Tremblay & Carol Horton Tremblay, 2005. "The US Brewing Industry: Data and Economic Analysis," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262201518, January.
    2. Sundaram,Rangarajan K., 1996. "A First Course in Optimization Theory," Cambridge Books, Cambridge University Press, number 9780521497701.
    3. Sundaram,Rangarajan K., 1996. "A First Course in Optimization Theory," Cambridge Books, Cambridge University Press, number 9780521497190.
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    Citations

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    Cited by:

    1. Benedetto Molinari & Francesco Turino, 2009. "Advertising, Labor Supply and the Aggregate Economy. A long run Analysis," Working Papers 09.16, Universidad Pablo de Olavide, Department of Economics.
    2. Dhaval M. Dave, 2013. "Effects of Pharmaceutical Promotion: A Review and Assessment," NBER Working Papers 18830, National Bureau of Economic Research, Inc.
    3. McCafferty, Michael & Bhuyan, Sanjib, 2012. "An analysis of market power in the U.S. brewing industry: A Simultaneous Equation Approach," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124675, Agricultural and Applied Economics Association.
    4. Driver, Ciaran, 2015. "Advertising’s Elusive Economic Rationale: is there a case for limiting tax relief?," MPRA Paper 68790, University Library of Munich, Germany.
    5. Natsuko Iwasaki & Victor Tremblay, 2009. "The effect of marketing regulations on efficiency: LeChatelier versus coordination effects," Journal of Productivity Analysis, Springer, vol. 32(1), pages 41-54, August.

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