Generic Advertising in an Asymmetric Cournot Oligopoly

Abstract

We examine how benefits of mandated generic advertising vary with firm size in an asymmetric Cournot oligopoly market. Generic advertising, funded through a mandatory assessment, changes demand but also increases firms’ costs. The effect on firm’s profits depends upon the nature of the change in demand and the company’s market share. Situations are identified in which generic advertising: (1) disproportionately favors large (small) firms, (2) decreases profits, and (3) increases (decreases) social welfare. Our findings explain the concerns that are often raised on small firms being disadvantaged by generic advertising. We discuss implications for policy and for firms’ advertising strategies.

Keywords: Cournot, demand rotation, demand shift, disproportionately, firm size, generic advertising, welfare

JEL Classification: L13, M30