Document Type

Article

Journal/Book Title/Conference

Economics Research Institute Study Paper

Volume

16

Publisher

Utah State University Department of Economics

Publication Date

2001

First Page

1

Last Page

21

Abstract

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.


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