Advertising in Vertical Relationships: An Equilibrium Model of the Automobile Industry
44 Pages Posted: 25 Jan 2017
Date Written: January 23, 2017
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: Suggested Citation