Firm Efficiency, Advertising and Profitability: Theory and Evidence - working paper

28 Pages Posted: 9 Sep 2017 Last revised: 21 Apr 2025

See all articles by Jihui Chen

Jihui Chen

Illinois State University

George Waters

Illinois State University

Multiple version iconThere are 2 versions of this paper

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

Chen, Jihui and Waters, George, Firm Efficiency, Advertising and Profitability: Theory and Evidence - working paper (February 01, 2017). Available at SSRN: https://ssrn.com/abstract=3033261 or http://dx.doi.org/10.2139/ssrn.3033261

Jihui Chen (Contact Author)

Illinois State University ( email )

Campus Box 4200
Economics Department
Normal, IL 61790-4200
United States

HOME PAGE: http://https://about.illinoisstate.edu/jchen4/pages/default.aspx

George Waters

Illinois State University ( email )

Normal, IL 61790-4200
United States

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