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INFORMATIVE ADVERTISING: COMPETITION OR COOPERATION?

Authors


  • *I thank Richard Friberg, Lars Sørgard, Thomas von Ungern, the Editor three anonymous referees, participants of the Lunch Workshop at The Stockholm School of Economics and seminar participants at The University of Cape Town for helpful comments and suggestions. This paper is a revision of Paper 1 of my Dissertation. Financial support from Vetenskapsrådet and the Wallander and Hedelius Foundation, ERSA and the UCT's URC Block grants is gratefully acknowledged. The usual disclaimer applies.

Abstract

In a duopoly version of the Grossman and Shapiro [1984] model of informative advertising, I examine firms' incentives to semicollude on advertising and the welfare implications thereof. I find that, relative to the noncooperative outcome, semicollusion on advertising is more profitable but is detrimental to welfare. I also find that when the advertising cost is ‘low,’ advertising semicollusion is more harmful to welfare than price semicollusion. These findings are important for competition policy since traditionally, cooperative advertising is not treated in the same light as price collusion.

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