Economics Research Institute Study Paper
Utah State University Department of Economics
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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.
Hunnicutt, Lynn and Israelsen, L. Dwight, "Incentives to Advertise and Economic Efficiency: The Difference Between Beef and Beer" (2001). Economic Research Institute Study Papers. Paper 229.