Firm Efficiency, Advertising and Profitability: Theory and Evidence - working paper
28 Pages Posted: 9 Sep 2017 Last revised: 21 Apr 2025
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Firm Efficiency, Advertising and Profitability: Theory and Evidence - working paper
Firm Efficiency, Advertising and Profitability: Theory and Evidence
Date Written: February 01, 2017
Abstract
This paper presents a linear-city model where firms compete on price and levels of advertising, which affects the perceived utility of products. More cost efficient firms extend their advantage with more advertising, which leads to higher profits, if advertising is sufficiently effective. We test this relationship using a unique S&P sample. Our empirical results indicate a positive relationship between profits and levels of advertising for all model specifications.
Keywords: Advertising, Market Structure, Performance, Hotelling
JEL Classification: D21, D22, M37
Suggested Citation: Suggested Citation