The strategic nature of advertising in segmented markets

We develop a simple model in which firm-specific advertising has cooperative and predatory effects. Our model is set in a static market where firms are naturally segmented into two distinct submarkets: several large firms located in the core, with small firms operating as a fringe. We test the net effect of opposing market size (cooperative) and market share (predatory) effects of both fringe and core firm advertising on the advertising decisions of large firms in several US consumer industries. Empirically, fringe firm advertising leads to an increase in advertising efforts by large firms, implying strategic complementarity. On the other hand, increased advertising by core firms in an industry decreases advertising expenditures of other core firms, indicating they are strategic substitutes. Our findings imply that equilibrium levels of advertising can be greater with asymmetric, rather than symmetric, strategic interactions.

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