Advertising in a Differentiated Duopoly and Its Policy Implications for an Open Economy

Jie Ma () and Alistair Ulph

Discussion Paper Series In Economics And Econometrics from University of Southampton, Economics Division, School of Social Sciences

Abstract: In this paper, we develop a model of advertising in a differentiated duopoly in which firms first decide how much to invest in cooperative or predatory advertising and then engage in product market competition (Cournot or Bertrand). We then use this model, with endogenously determined type of advertising, to explore the policy implications in the context of a Brander-Spencer third-country model of strategic trade. We first analyse optimal policies when governments use both trade and industrial policies and show that these policies are substitutes. We then study optimal policy when governments can use only one policy instrument and show that industrial policy is robust, i.e., governments will always use an advertising subsidy irrespective of the type of advertising and form of market competition. More interestingly we show that for a range of parameter values we also get robust trade policy in which governments always use a trade subsidy irrespective of the type of advertising or form of market competition. Key Words: Cooperative advertising, Predatory advertising, First best policy combination, Robust industrial policy, Robust trade policy JEL Classification: F13, L13

Date: 2003-10-22
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Persistent link: http://EconPapers.repec.org/RePEc:stn:sotoec:0406

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