TITLE:
Optimal Commodity Advertising in Bilateral Oligopoly
AUTHORS:
Chanjin Chung
KEYWORDS:
Bilateral Market Power, Optimal Advertising, Production Function
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.11,
July
23,
2018
ABSTRACT: This study derives an optimal commodity advertising
intensity rule for a vertically related market under bilateral oligopoly. The
new optimality condition derived in this study extends the seminal
Dorfman-Steiner Theorem [1] and recently published optimal advertising
conditions by two major aspects. First, we strengthen the previous work by
considering potential market power exertion in all buying (input) and selling
(output) markets, i.e., all four
adjacent upstream and downstream markets of processors and retailers. Second,
we use a primal production function approach to avoid the symmetry assumption
that many earlier studies imposed on conjectural elasticities of input and/or
output markets. Our new condition suggests that, without considering the
potential market power exertions, the optimal advertising intensity and
expenditures are overestimated. Our derivation also indicates that previous
optimal advertising conditions derived under the assumption of fixed proportion
technology could underestimate the optimal intensity and expenditures,
particularly when advertising elasticity is elastic.