An Analysis of Advertising Wars

Hans Haller and Subhadip Chakrabarti
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Hans Haller: Virginia Polytechnic Institute and State University

No 2002-03, CIE Discussion Papers from University of Copenhagen. Department of Economics. Centre for Industrial Economics

Abstract: Comparative advertising by one brand against another showcases its merits versus the demerits of the other. In a two-stage game among finitely many firms, firms decide first on how much to advertise against whom. In the second stage, given the advertising configuration, firms compete as Cournot oligopolists. In the symmetric case, equilibrium advertising expenses constitute a clear welfare loss. Equilibrium advertising levels and advertising expenditures decline with rising advertising costs. Whereas equilibrium levels of advertising decrease in the number of firms, aggregate advertising expenditures increase. We further relate effectiveness of advertising to proximity in product space. With two firms, comparative advertising and quality choice have similar effects. In a three-stage game, where firms choose first locations (variety), then advertising levels (quality), and then quantities, we obtain maximum horizontal product differentiation and minimum vertical product differentiation.

Keywords: Advertising; Cournot Oligopoly; Product Differentiation (search for similar items in EconPapers)
JEL-codes: C72 L13 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2002-11
New Economics Papers: this item is included in nep-com and nep-ind
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Journal Article: AN ANALYSIS OF ADVERTISING WARS (2011)
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