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Informative Advertising in Concentrated, Differentiated Markets

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  • Hamilton, Stephen F.

Abstract

I examine the welfare implications of informative advertising in a differentiated product duopoly market. The analysis reconciles the apparently conflicting results in previous studies that find advertising to be undersupplied in homogeneous product markets and in differentiated markets with a limited number of firms, but oversupplied in differentiated markets with a large number of firms. In equilibrium, purely informative advertising is always overprovided when the degree of product differentiation exceeds a threshold level. The result is robust and obtains under conditions of both price and quantity competition. Product differentiation also has welfare implications for the effect of technological change in the advertising sector. In response to an advertising cost innovation (e.g., through the emergence of cable TV and internet media), the equilibrium prices and advertising levels converge to the social optimum when the products are sufficiently non-differentiated, whereas divergence occurs for more differentiated goods

Suggested Citation

  • Hamilton, Stephen F., 2004. "Informative Advertising in Concentrated, Differentiated Markets," Working Papers 201546, University of Wisconsin-Madison, Department of Agricultural and Applied Economics, Food System Research Group.
    • Handle: RePEc:ags:uwfswp:201546
    DOI: 10.22004/ag.econ.201546
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    References listed on IDEAS

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    Cited by:

    1. Levent Celik, 2007. "Informative Advertising and Consumer Search in a Differentiated-Products Duopoly," CERGE-EI Working Papers wp332, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. Nada Ben Elhadj-Ben Brahim & Rim Lahmandi-Ayed & Didier Laussel, 2014. "Is Targeted Advertising always Beneficial?," World Scientific Book Chapters, in: Kaddour Hadri & William Mikhail (ed.), Econometric Methods and Their Applications in Finance, Macro and Related Fields, chapter 20, pages 551-585, World Scientific Publishing Co. Pte. Ltd..

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