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Non-price advertising and price competition: a theory, and evidence from the Brazilian beer market

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  • Renato D.B. Gomes

    (Ph.D. Student, Department of Economics - Northwestern University.)

  • João Manoel Pinho de Mello

    () (Department of Economics PUC-Rio.)

Abstract

By engendering horizontal differentiation, non-price advertising increases the incentives to accommodate on the price dimension. However, advertising also increases the size of the market and, consequently, the payoffs to price undercutting, which induces more aggressive price competition. We propose a theory in which advertising has a different effect on price competition according to the level of market maturity. In mature markets - where potential growth in low - only the price accommodation effect is present. In immature markets, both effects are present. Therefore, advertising is more procompetitive (less anti-competitive) in immature markets. Evidence from several Brazilian beer markets corroborates the theory.

Suggested Citation

  • Renato D.B. Gomes & João Manoel Pinho de Mello, 2006. "Non-price advertising and price competition: a theory, and evidence from the Brazilian beer market," Textos para discussão 525, Department of Economics PUC-Rio (Brazil).
  • Handle: RePEc:rio:texdis:525
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    References listed on IDEAS

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    1. Joel Waldfogel & Jeffrey Milyo, 1999. "The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart," American Economic Review, American Economic Association, vol. 89(5), pages 1081-1096, December.
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    3. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
    4. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    5. Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 63-81.
    6. Kwoka, John E, Jr, 1984. "Advertising and the Price and Quality of Optometric Services," American Economic Review, American Economic Association, vol. 74(1), pages 211-216, March.
    7. Schroeter, John R & Smith, Scott L & Cox, Steven R, 1987. "Advertising and Competition in Routine Legal Service Markets: An Empirical Investigation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(1), pages 49-60, September.
    8. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
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