Style over substance? Advertising, innovation, and endogenous market structure

Laurent Cavenaile, Murat Celik, Pau Roldan-Blanco and Xu Tian

Journal of Monetary Economics, 2025, vol. 149, issue C

Abstract: While firms use both innovation and advertising to boost profits, markups, and market shares, their broader social implications vary substantially. We study their interaction and analyze their implications for competition, industry dynamics, growth, and welfare. We develop an oligopolistic general-equilibrium growth model with firm heterogeneity. Market structure is endogenous, and firms’ production, innovation, and advertising decisions interact strategically. We find advertising reduces static misallocation, but also depresses growth through a substitution effect with R&D. Although advertising is found to be socially useful, taxing it could simultaneously increase dynamic efficiency, contain excessive advertising spending, and raise revenue, while still reducing misallocation.

Keywords: Innovation; Advertising; Markups; Growth; Industry dynamics; Misallocation; Business dynamism (search for similar items in EconPapers)
JEL-codes: E20 M30 O30 O40 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:149:y:2025:i:c:s0304393224001363

DOI: 10.1016/j.jmoneco.2024.103683

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