Style Over Substance? Advertising, Innovation, and Endogenous Market Structure

87 Pages Posted: 15 Mar 2021 Last revised: 5 Sep 2024

See all articles by Laurent Cavenaile

Laurent Cavenaile

University of Toronto at Scarborough; University of Toronto - Rotman School of Management

Murat Alp Celik

University of Toronto - Department of Economics

Pau Roldan-Blanco

Banco de España

Xu Tian

University of Georgia - Terry College of Business - Department of Finance

Date Written: April 29, 2022

Abstract

While firms use both innovation and advertising to boost profits, markups, and market shares, their broader social implications vary substantially. We study their interaction and analyze their implications for competition, industry dynamics, growth, and welfare. We develop an oligopolistic general-equilibrium growth model with firm heterogeneity. Market structure is endogenous, and firms' production, innovation, and advertising decisions interact strategically. We find advertising reduces static misallocation, but also depresses growth through a substitution effect with R&D. Although advertising is found to be socially useful, taxing it could simultaneously increase dynamic efficiency, contain excessive advertising spending, and raise revenue, while still reducing misallocation.

Keywords: innovation, advertising, markups, growth, industry dynamics, misallocation, business dynamism JEL Classification: E20, M30, O30, O40

JEL Classification: E20, M30, O30, O40

Suggested Citation

Cavenaile, Laurent and Celik, Murat Alp and Roldan-Blanco, Pau and Tian, Xu, Style Over Substance? Advertising, Innovation, and Endogenous Market Structure (April 29, 2022). Available at SSRN: https://ssrn.com/abstract=3804065 or http://dx.doi.org/10.2139/ssrn.3804065

Laurent Cavenaile

University of Toronto at Scarborough ( email )

1265 Military Trail
Scarborough, Ontario M1C 1A4
Canada

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Murat Alp Celik (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George St.
Toronto, ON M5S 3G7
Canada

HOME PAGE: http://muratcelik.faculty.economics.utoronto.ca/

Pau Roldan-Blanco

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Xu Tian

University of Georgia - Terry College of Business - Department of Finance ( email )

620 S Lumpkin St
Athens, GA 30602
United States

HOME PAGE: http://www.xutianur.com

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