Incentives to advertise: too strong, too weak, or just right?
There is some debate about whether firms advertise too much or too little. We present a simple model to examine the incentives of a firm to advertise, and distinguish between the market expansion effects and business stealing effects of advertising. When products are homogeneous, firms advertise too little relative to the amount that would maximize total industry profits. In differentiated products markets, the possibility of stealing customers from competitors causes firms to advertise too much. Finally, we derive conditions that determine when an expansion in one firm’s advertising level increases rival advertising.
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