Advertising Subsidy and International Oligopolistic Competition

Abstract

This paper examines the strategic role of advertising subsidies in a third-country trade model in which two firms located in different countries export their products to a third country (Brander and Spencer (1985)). We first develop a basic model of advertising in oligopolistic industries in which firms decide how much to invest in either predatory or cooperative advertising and then engage in product market competition either as Cournot competitors or Bertrand competitors. We show that firms invest in only one form of advertising; which form they invest in depends on the relative effectiveness of the two types of advertising, the degree of product differentiation and the form of product market competition. We then study strategic industrial policy and show that an advertising subsidy is the optimal strategic policy irrespective of the form of product market competition and the form of advertising in which firms invest.

Keywords: Advertising subsidy, Strategic industrial policy, Cooperative advertising, Predatory advertising

JEL Classification: F12, F13, L13