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Does competition increase advertising?

Author

Listed:
  • Travis Ng

    (CUHK - The Chinese University of Hong Kong [Hong Kong])

  • Tat-Kei Lai

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

Abstract

In the Milgrom-Roberts's advertising model, introducing the possibility to die before customers' repurchase alters the firm's advertising incentive to signal hidden product quality. Two opposing forces result, one mechanical and the other strategic. Depending on their relative strengths, the equilibrium advertising can either rise or fall. To the extent that competition threatens firms' survival, our result explains the mixed findings on the causal effects of competition on advertising. Introducing firm deaths in their model offers a new test of whether advertising signals quality, still an unsettled empirical question since Nelson first articulates advertising as a signal in 1974.

Suggested Citation

  • Travis Ng & Tat-Kei Lai, 2023. "Does competition increase advertising?," Post-Print hal-04127958, HAL.
    • Handle: RePEc:hal:journl:hal-04127958
    DOI: 10.1002/mde.3874
    as

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    References listed on IDEAS

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    1. Schmalensee, Richard, 1978. "A Model of Advertising and Product Quality," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 485-503, June.
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    Cited by:

    1. Al-Gamrh, Bakr & Rasul, Tareq, 2024. "Recession-proof marketing? Unraveling the impact of advertising efficiency on stock volatility," International Review of Financial Analysis, Elsevier, vol. 92(C).

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