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Advertising in a differentiated duopoly and its policy implications for an open economy

Advertising in a differentiated duopoly and its policy implications for an open economy
Advertising in a differentiated duopoly and its policy implications for an open economy
In this paper, we develop a model of advertising in a differentiated duopoly in which firms first decide how much to invest in cooperative or predatory advertising and then engage in product market competition (Cournot or Bertrand). We then use this model, with endogenously determined type of advertising, to explore the policy implications in the context of a Brander-Spencer third-country model of strategic trade. We first analyse optimal policies when governments use both trade and industrial policies and show that these policies are substitutes. We then study optimal policy when governments can use only one policy instrument and show that industrial policy is robust, i.e., governments will always use an advertising subsidy irrespective of the type of advertising and form of market competition. More interestingly we show that for a range of parameter values we also get robust trade policy in which governments always use a trade subsidy irrespective of the type of advertising or form of market competition.
cooperative advertising, predatory advertising, first best policy combination, robust industrial policy, robust trade policy
406
University of Southampton
Ma, Jie
52725a6f-d801-410c-afca-b08220d9f27b
Ulph, Alistair
82a2f3b8-ac72-4d0e-85cc-2760eb99b117
Ma, Jie
52725a6f-d801-410c-afca-b08220d9f27b
Ulph, Alistair
82a2f3b8-ac72-4d0e-85cc-2760eb99b117

Ma, Jie and Ulph, Alistair (2004) Advertising in a differentiated duopoly and its policy implications for an open economy (Discussion Papers in Economics and Econometrics, 406) Southampton. University of Southampton

Record type: Monograph (Discussion Paper)

Abstract

In this paper, we develop a model of advertising in a differentiated duopoly in which firms first decide how much to invest in cooperative or predatory advertising and then engage in product market competition (Cournot or Bertrand). We then use this model, with endogenously determined type of advertising, to explore the policy implications in the context of a Brander-Spencer third-country model of strategic trade. We first analyse optimal policies when governments use both trade and industrial policies and show that these policies are substitutes. We then study optimal policy when governments can use only one policy instrument and show that industrial policy is robust, i.e., governments will always use an advertising subsidy irrespective of the type of advertising and form of market competition. More interestingly we show that for a range of parameter values we also get robust trade policy in which governments always use a trade subsidy irrespective of the type of advertising or form of market competition.

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Published date: 2004
Keywords: cooperative advertising, predatory advertising, first best policy combination, robust industrial policy, robust trade policy

Identifiers

Local EPrints ID: 33807
URI: http://eprints.soton.ac.uk/id/eprint/33807
PURE UUID: 50031f3f-a549-488f-84a9-0265c240bd81

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Date deposited: 18 May 2006
Last modified: 15 Mar 2024 07:45

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Contributors

Author: Jie Ma
Author: Alistair Ulph

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