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Incentives to advertise and economic efficiency


  • L. Israelsen
  • L. Hunnicutt


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 effect and the business-stealing effect of advertising. Firms advertise homogeneous products (beef) too little relative to the amount that would maximize total industry profits. The possibility of stealing customers from competitors causes firms in differentiated products markets (beer) to advertise too much. Finally, we derive conditions that determine when an expansion in one firm’s advertising level increases rival advertising.

Suggested Citation

  • L. Israelsen & L. Hunnicutt, 2001. "Incentives to advertise and economic efficiency," Working Papers 2001-16, Utah State University, Department of Economics.
  • Handle: RePEc:usu:wpaper:2001-16

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    References listed on IDEAS

    1. R. K. Blamey & J. W. Bennett & M. D. Morrison, 1999. "Yea-Saying in Contingent Valuation Surveys," Land Economics, University of Wisconsin Press, vol. 75(1), pages 126-141.
    2. Roger A. Sedjo & Stephen K. Swallow, 2002. "Voluntary Eco-Labeling and the Price Premium," Land Economics, University of Wisconsin Press, vol. 78(2), pages 272-284.
    3. Bengt Kriström, 1997. "Spike Models in Contingent Valuation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1013-1023.
    4. Kevin J. Boyle & Hugh F. MacDonald & Hsiang-tai Cheng & Daniel W. McCollum, 1998. "Bid Design and Yea Saying in Single-Bounded, Dichotomous-Choice Questions," Land Economics, University of Wisconsin Press, vol. 74(1), pages 49-64.
    5. Laura O. Taylor & Ronald G. Cummings, 1999. "Unbiased Value Estimates for Environmental Goods: A Cheap Talk Design for the Contingent Valuation Method," American Economic Review, American Economic Association, vol. 89(3), pages 649-665, June.
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