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Does competition increase advertising?

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  • Tat‐kei Lai
  • Travis Ng

Abstract

In the Milgrom‐Roberts's advertising model, introducing the possibility to die before customers' repurchase alters the firm's advertising incentive to signal hidden product quality. Two opposing forces result, one mechanical and the other strategic. Depending on their relative strengths, the equilibrium advertising can either rise or fall. To the extent that competition threatens firms' survival, our result explains the mixed findings on the causal effects of competition on advertising. Introducing firm deaths in their model offers a new test of whether advertising signals quality, still an unsettled empirical question since Nelson first articulates advertising as a signal in 1974.

Suggested Citation

  • Tat‐kei Lai & Travis Ng, 2023. "Does competition increase advertising?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(6), pages 3233-3248, September.
    • Handle: RePEc:wly:mgtdec:v:44:y:2023:i:6:p:3233-3248
    DOI: 10.1002/mde.3874
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