An Analysis of Advertising Wars

Abstract

Comparative advertising by one brand against another showcases its merits versus the demerits of the other. In a two-stage game among finitely many firms, firms decide first how much to advertise against whom. In the second stage, given the advertising configuration, firms compete as Cournot oligopolists. In the symmetric case, equilibrium advertising constitutes a clear welfare loss. Equilibrium advertising levels and advertising expenditures decline with rising advertising costs. Whereas equilibrium levels of advertising decrease in the number of firms, aggregate advertising expenditures increase. We further relate effectiveness of advertising to proximity in product space. With two firms, comparative advertising and quality choice have similar effects. In a three stage game, where firms choose first locations (variety), then advertising levels (quality), and then quantities, we obtain maximum horizontal product differentiation and minimum vertical product differentiation.Advertising, Cournot Oligopoly, Product Differentiation