Informative Advertising: Competition or Cooperation?

19 September 2012
Publication Type: Working Paper
JEL Code: D43, L13, L15, M37

I compare the outcome when firms semicollude on advertising to the outcome in the Grossman and Shapiro (1984) model of informative advertising. I show that advertising is lower but prices and profits are higher under semicollusion on advertising. I also show that semicollusion on advertising is detrimental to welfare. Although firms earn higher profits when colluding on advertising, fewer consumers are informed, and as a result, welfare is lower. Compared to semicollusion on price, semicollusion on advertising is not always less profitable. Hence I lend theoretical support to empirical studies that find evidence of collusion on advertising rather than price.

Working Paper 033
1 January 2006
Journal: 2009, Journal of Industrial Economics, (LVII), 147-166