Advertising in Vertical Relationships: An Equilibrium Model of the Automobile Industry

44 Pages Posted: 25 Jan 2017

Date Written: January 23, 2017

Abstract

I develop and estimate a model of pricing and advertising decisions of new car manufacturers and dealers. The model highlights a selling effort externality between dealers and manufacturers, which leads to estimated manufacturer markups that are about half compared to those from a model that does not endogenize advertising in the vertical relationship. I quantify the welfare effects of state regulations that restrict wholesale contracts by simulating the adoption of a franchise fee contract. I predict a 10% decrease in prices, an 8% increase in dealer advertising, and substantial gains in consumer welfare compared to the current linear price contract.

Keywords: vertical relationships, advertising, spatial competition, automobiles, franchise regulation

JEL Classification: D22, L13, L62, M37

Suggested Citation

Murry, Charles, Advertising in Vertical Relationships: An Equilibrium Model of the Automobile Industry (January 23, 2017). Available at SSRN: https://ssrn.com/abstract=2549247 or http://dx.doi.org/10.2139/ssrn.2549247

Charles Murry (Contact Author)

Penn State University ( email )

524 Kern Graduate Building
University Park, PA 16802-3306
United States

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