The Advertising-price Relationship: Theory and Evidence

The relationship between advertising and price is important because the welfare effect of advertising depends upon the price effect of advertising. We attempt to provide a better understanding of the theoretical relationship between advertising and price. We establish theoretical conditions sufficie...

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Bibliographic Details
Published in:International journal of the economics of business 2008-07, Vol.15 (2), p.149-167
Main Authors: Iwasaki, Natsuko, Kudo, Yasushi, Tremblay, Carol Horton, Tremblay, Victor J.
Format: Article
Language:English
Subjects:
Advertising
Breweries
Brewing Industry
Cigarette Industry
Costs
Demand
Duopoly
Economic models
Game theory
Price
Prices
Studies
Supermodularity
Tobacco industry
U.S.A
Welfare economics
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Summary:The relationship between advertising and price is important because the welfare effect of advertising depends upon the price effect of advertising. We attempt to provide a better understanding of the theoretical relationship between advertising and price. We establish theoretical conditions sufficient for advertising to raise prices. This will occur, for example, when firms play a supermodular game - a structure that considers the type of advertising (i.e., persuasive, image creating, or informative) and the effect that advertising has on a firm's demand and costs. We also compare results from two simple duopoly models, one with horizontal and the other with vertical differentiation, and find that only the model with horizontal differentiation is supermodular for the forms of advertising that are thought to raise price (e.g., persuasive advertising). In consideration of these theoretical issues, we then develop an empirical model to determine whether advertising raises prices in the US brewing and cigarette industries.
ISSN:1357-1516
1466-1829
DOI:10.1080/13571510802134213