Working Paper Series no. 284: Innovation and Advertising: Theory and Evidence

Abstract

Advertising and innovation are two engines for firms to escape competition through a better attraction power toward consumers or quality advantage. We propose a model that encompasses both the static and dynamic interactions between R&D, advertising and competitive environment. This model provides two main predictions. First, for a given competitive environment, quality leaders spend more in advertising in order to extract maximal rents; thus, lower costs of ads may favor R&D. Second, more competition pushes Neck and Neck firms to advertise more to attract a larger share of consumers on their products or services. Empirical evidence from a large panel of 59,000 French firms over 1990-2004 supports these two properties.

Philippe Askenazy, Thomas Breda and Delphine Irac
May 2010

Classification JEL : D4, O31, D12

Keywords : advertising, innovation, competition, Lerner.