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An Analysis of Advertising Wars

  • Hans Haller

    (Virginia Polytechnic Institute and State University)

  • Subhadip Chakrabarti

    (Virginia Polytechnic Institute and State University)

Comparative advertising by one brand against another showcases its merits versus the demerits of the other. In a two-stage game among finitely many firms, firms decide first on how much to advertise against whom. In the second stage, given the advertising configuration, firms compete as Cournot oligopolists. In the symmetric case, equilibrium advertising expenses constitute a clear welfare loss. Equilibrium advertising levels and advertising expenditures decline with rising advertising costs. Whereas equilibrium levels of advertising decrease in the number of firms, aggregate advertising expenditures increase. We further relate effectiveness of advertising to proximity in product space. With two firms, comparative advertising and quality choice have similar effects. In a three-stage game, where firms choose first locations (variety), then advertising levels (quality), and then quantities, we obtain maximum horizontal product differentiation and minimum vertical product differentiation.

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File URL: http://www.econ.ku.dk/cie/dp/dp_2000-2002/2002-03.pdf/
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Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2002-03.

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Length: 28 pages
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:kud:kuieci:2002-03
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  2. Economides, Nicholas, 1989. "Quality variations and maximal variety differentiation," Regional Science and Urban Economics, Elsevier, vol. 19(1), pages 21-29, February.
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  7. Julian M. Alston & John W. Freebairn & Jennifer S. James, 2001. "Beggar-Thy-Neighbor Advertising: Theory and Application to Generic Commodity Promotion Programs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 888-902.
  8. Nicholas Kaldor, 1950. "The Economic Aspects of Advertising," Review of Economic Studies, Oxford University Press, vol. 18(1), pages 1-27.
  9. Tabuchi, Takatoshi, 1994. "Two-stage two-dimensional spatial competition between two firms," Regional Science and Urban Economics, Elsevier, vol. 24(2), pages 207-227, April.
  10. Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-23, March.
  11. Bloch, Francis & Manceau, Delphine, 1999. "Persuasive advertising in Hotelling's model of product differentiation," International Journal of Industrial Organization, Elsevier, vol. 17(4), pages 557-574, May.
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