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Does Competition Increase Advertising?

Author

Listed:
  • Tat-kei Lai

    (IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Economie Management, France)

  • Travis Ng

    (The Chinese University of Hong Kong, Hong Kong)

Abstract

In Milgrom-Roberts (1986)’s 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 (1974) first articulates advertising as a signal.

Suggested Citation

  • Tat-kei Lai & Travis Ng, 2023. "Does Competition Increase Advertising?," Working Papers 2023-iFlame-02, IESEG School of Management.
    • Handle: RePEc:ies:wpaper:e202405
    as

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    References listed on IDEAS

    as
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