Innovation and Advertising: Theory and Evidence
32 Pages Posted: 7 Jul 2010
Date Written: May 1, 2010
Advertising and innovation are two engines for firms to escape competition through a better attraction power toward consumers or quality advantage. We propose a model that encompasses both the static and dynamic interactions between R&D, advertising and competitive environment. This model provides two main predictions. First, for a given competitive environment, quality leaders spend more in advertising in order to extract maximal rents; thus, lower costs of ads may favor R&D. Second, more competition pushes Neck and Neck firms to advertise more to attract a larger share of consumers on their products or services. Empirical evidence from a large panel of 59,000 French firms over 1990-2004 supports these two properties.
Keywords: advertising, innovation, competition, Lerner
JEL Classification: D4, O31, D12
Suggested Citation: Suggested Citation