A BEJTE Topics article.

Abstract

Consider a Cournot oligopoly where producers launch new products. At first potential buyers are unaware of the product, and firms decide on levels of production, advertising expenditure and a cost-reducing investment. We find the conditions for complementarities among scale, advertising and innovation strategies to arise. In a duopoly with substitute products all variables are higher for the firm that moves from mass advertising to targeted advertising but decrease for the other. In an oligopoly with complementary products all variables are higher for all firms when they shift away from mass marketing. We conclude by linking our results to the empirical literature on internalization which finds a positive relationship between advertising intensity and foreign direct investment.

Submitted: October 23, 2008 · Accepted: March 17, 2009 · Published: April 2, 2009

Recommended Citation

Immordino, Giovanni (2009) "Advertising and Cost Reduction," The B.E. Journal of Theoretical Economics: Vol. 9 : Iss. 1 (Topics), Article 10.
DOI: 10.2202/1935-1704.1530
Available at: http://www.bepress.com/bejte/vol9/iss1/art10