Informative Advertising In Monopolistically Competitive Markets

In their seminal paper Grossman and Shapiro (1984) find that informative advertising is socially excessive in an oligopoly (entry is also socially excessive). However, the analysis assumed that all consumers receive at least one advertisement. Christou and Vettas (2008), among others, present counter-examples in alternative settings, showing when the assumption does not hold, the equilibrium advertising may, instead, be inefficiently low. Christou and Vettas (2008) also show there may be non-existence due to discontinuities from undercutting, that quasiconcavity may not hold, and present examples in which the equilibrium does not exist as firms would deviate to a higher price. We revisit the question by modeling firms (like consumers) as a continuum, which mitigates the discontinuity that exists in both papers and allows the general analysis to include the cases when some consumers receive no advertisements. As a result, we are able to derive explicit and intuitive conditions for an equilibrium. More importantly, we find, instead, that advertising is socially insufficient regardless of the fraction of the consumers who receive an ad, including when all consumers receive at least one ad. We also find that there is insufficient entry instead of excess entry. We provide intuition for the difference between our and previous results.