Essays on advertising and innovation in imperfectly competitive markets

Abstract

This thesis consists of four independent chapters that study alternative .rms.long run strategies in imperfectly competitive markets. The .rst chapter, "Comparative vs. Informative Advertising in Oligopolistic Markets", ex- plores the .rms.incentives to invest in informative and comparative advertising in oligopolistic markets with horizontally di¤erentiated products. It is found that, in equilibrium the .rms optimally mix over advertising strategies, combining both informative and comparative adver- tising. Further, it is shown that the optimal advertising mix always favors the aggressive form of comparative advertising. The chapter also compares equilibrium market outcomes and social welfare under the endogenous advertising portfolio with the respective ones under no adver- tising, mere informative advertising and mere comparative advertising, and shows that they crucially depend on the intensity of market competition and the e¢ ciency of the advertising technology. The second chapter, "Comparative Advertising in Markets with Network Externalities", investigates the .rms.incentives to invest in comparative advertising in a spatially di¤erentiated duopoly market characterized by network externalities. It is found that .rms often have strong incentives to invest in comparative advertising, with their equilibrium investment levels to be positively related to transportation cost and negatively related to the intensity of network e¤ects. More importantly, it is shown that the .rms.location distance (or else, their products. di¤erentiation) increases in the presence of network externalities and decreases in the presence of comparative advertising. The third chapter, "The Speed of Technological Adoption under Price Competition: Two- tier vs. One-tier Industries", examines the .rms. incentives to adopt a new cost reducing technology in vertically related markets, as well as, the e¤ects of the vertical relations on the speed of the downstream .rms.adoption of the new technology. It is found that, independently of the upstream market structure (i.e., upstream separate .rms or upstream monopoly), down- stream .rms always have strong incentives to adopt the new technology. More importantly, it is shown that, independently of the upstream market structure, technology adoption may occur earlier in two-tier than in one-tier industries, depending on the intensity of the .nal market competition, the drasticity of the new technology on reducing the downstream .rms.marginal cost of production and the bargaining power distribution in the market. Moreover, it is found that the .rst technology adoption takes place earlier under upstream monopoly than under upstream separated .rms, when the new technology is su¢ ciently drastic and the .nal market competition is .erce enough. The forth chapter, "Cournot is more Competitive than Bertrand! Upstream Monopoly with Two-part Tari¤s", compares the equilibrium outcomes and social welfare under Cournot and Bertrand downstream competition when the upstream sector is monopolized by a single input provider and the vertical trade is conducted via two-part tari¤s contracts. It is found that, in such a setting, a Cournot downstream market turns out to be more competitive than a Bertrand one. In addition, contrary to the conventional wisdom that suggests that Bertrand competition leads to higher social welfare than Cournot competition, it is shown that in verti- cally related markets with upstream monopolistic market structure and two-part tari¤s trading contracts, consumers.surplus and social welfare are higher under Cournot than under Bertrand competition.