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Review of Industrial Organization
Erschienen in: Review of Industrial Organization 1/2017

26.08.2016

Informative Advertising in a Mixed Oligopoly

verfasst von: Shaohua Han, John S. Heywood, Guangliang Ye

Erschienen in: Review of Industrial Organization | Ausgabe 1/2017

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Abstract

We study a mixed duopoly in which firms compete in advertising and quantity. The sum of informative advertising undertaken often exceeds that in a private duopoly, and whenever this happens the presence of the public (i.e., government) firm decreases social welfare. Surprisingly, the public firm may increase its advertising as the cost of advertising increases. Moreover, the basic insight that the public firm can increase advertising and reduce welfare remains when there are advertising spillovers, in a case with a foreign rival, and in an illustration of Bertrand competition.
Vorheriger Artikel IP-for-IP or Cash-for-IP? R&D Competition and the Market for Technology
Nächster Artikel Optimal Product Placement

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Fußnoten
1
Among the issues that are explored in the vast mixed oligopoly literature are the welfare implications of public ownership (De Fraja and Delbono 1989; Matsumura 1998) and the consequences for strategic trade (Pal and White 1998), for research and development (Zikos 2010), for patent licensing (Chen et al. 2014), for mergers (Méndez-Naya 2008), for delegation (Du et al. 2013), for environmental quality (Pal and Saha 2014), and for location choices (Heywood and Ye 2009; Zhang and Li 2013).
 
2
Public firm advertising can be controversial: The US press periodically questions whether the Postal Service, with a legislative monopoly on first-class mail, should advertise or sponsor, for example, the US cycling team (Palmer 2013). Similarly, ATB Financial (the publically owned bank in Alberta Canada) sponsors major sports tournaments.
 
3
Among many papers that assume such a cost difference, see Pal (1998), Wang and Mukherjee (2012), and Gelves and Heywood (2013). Theoretical and empirical support comes from Matsumura and Matsushima (2004) and Megginson and Netter (2001), respectively. The normalization of the private rival's cost to zero does not materially influence the propositions that we derive as \(\gamma\) captures the relative production cost inefficiency of the public firm X.
 
4
In this sense all advertisements are "effective" in providing information to the consumer.
 
5
The classic example is the distribution of leaflets on a prominent corner, with the critical point being that some consumers may never receive a leaflet and some may receive more than one.
 
6
The common per unit advertising cost of α reflects that most advertising is purchased in a market rather than produced by the firm itself. If we relax this assumption, our main conclusions remain but critical values will change. For example, if the public firm has a larger α than the private firm, the public firm would decrease advertising but the private firm would increase advertising, and thus the range in which the public firm does more advertising than the private firm is smaller (see Fig. 1). If the public firm has a smaller α, the range in which the public firm does more advertising than the private firm will be larger.
 
7
An alternative might assume that if firm X competes by profit maximizing it should not suffer the cost disadvantage (Gelves and Heywood 2013). Assuming this would improve the relative social welfare of the private oligopoly but takes the focus away from our interest in the consequences of the different objective functions of profit and welfare for the two firms.
 
8
Even in a simple mixed duopoly with linear costs and no advertising, a large enough cost disadvantage for the public firm can cause its (Nash-Cournot) efforts to maximize welfare instead to reduce welfare relative to a purely private profit-maximizing duopoly.
 
9
Indeed, it can be shown that if the public firm were a timing leader in both the advertising and output stages of the game, welfare would not decline with the advent of the public firm. Alternatively, one might imagine a new initial stage to the game in which the government moves first to tell the public firm to behave either as a welfare or profit maximizer. This would also eliminate the loss in welfare that is associated with the public firm.
 
10
A proof of this point is available from the authors upon request.
 
11
Although total advertising generally declines with the extent of free-riding, when α and γ are small an increase in β can initially increase total advertising, since the increase by the public firm exceeds the decrease by the private firm.
 
12
A more complete simulation for many values of \(\beta\) is available upon request.
 
13
A demonstration of these results is available upon request.
 
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Metadaten
Titel
Informative Advertising in a Mixed Oligopoly
verfasst von
Shaohua Han
John S. Heywood
Guangliang Ye
Publikationsdatum
26.08.2016
Verlag
Springer US
Erschienen in
Review of Industrial Organization / Ausgabe 1/2017
Print ISSN: 0889-938X
Elektronische ISSN: 1573-7160
DOI
https://doi.org/10.1007/s11151-016-9541-0

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