Advertising in Differentiated Markets: The Effect of Incomplete Coverage

This paper considers the role of promotional expenditures by firms in a differentiated product oligopoly model. Advertising is informative and has two types of effects on demand, accommodating effects, which increase total demand in the product class, and predatory effects, which serve only to redistribute consumers among brands in the product class. Depending on the relative importance of each type of effect, advertising can make the demand facing individual brands more elastic or less elastic. This has important implications for whether or not the market-determined levels of advertising are excessive from the welfare perspective. We compare oligopoly outcomes under multi-brand promotion by a monopolist, as well as under both quantity-setting and price-setting forms of oligopoly to the social optimum and identify the linkage between the nature of oligopoly interaction and the predominance of certain forms of advertising effects.