Strategic Informative Advertising on TV

In order to get a grasp of the market for advertising, one needs to understand why firms demand advertising, and how suppliers of advertising set their prices. In the present analysis, firms buy advertising in order to inform consumers about their products. TV channels offer advertising on a per-viewer basis. We find that the performance of this market for advertising depends on features of both the demand side and the supply side. In particular, the price of advertising is increasing both in the degree of consumer heterogeneity in the product market, and in the difference between the TV channels’ audiences. (100 words) ∗ We have received helpful comments from Miguel Villas-Boas and two referees. This research is financed in part by the Norwegian Competition Authority and the Norwegian Ministry of Government Administration, through SNF the Foundation for Research in Economics and Business Administration. Part of Nilssen's research was done during a visit at the Haas School of Business at the University of California, Berkeley. Part of Sørgard's research was done during a visit at the Department of Economics at the University of California, Santa Barbara. The hospitality of the two institutions, as well as travel grants from the Research Council of Norway and the U.S.-Norway Fulbright Foundation for Educational Exchange, are gratefully acknowledged.