25 février 2022

Heure: 10h30 à 11h45
Lieu: DES-2225 (+ en ligne)

Description de l'événement

Conférencier: Laurent Cavenaile

Invité par: Catherine Michaud-Leclerc

«Style Over Substance? Advertising, Innovation and Endogenous Market Structure» avec Murat Celik, Pau Roldan-Blanco et Xu Tian.

Firms use both innovation and advertising to increase their profits, markups, and market shares. While they serve the same purpose from the firms’ perspective, their broader implications vary substantially. In this paper, we study the interaction between these two intangible inputs and analyze the implications for competition, industry dynamics, economic growth, and social welfare. To this end, we develop an oligopolistic general-equilibrium growth model with firm heterogeneity in which market structure is endogenous, and firms’ production, innovation, and advertising decisions strategically interact. We estimate the model to fit the non-linear relationship between innovation, advertising, and competition observed in the data. We find that advertising has significant macroeconomic effects: it improves static allocative efficiency through reducing misallocation, but it also depresses economic growth through a substitution effect with R&D. On the net, advertising is found to be welfare-improving. It is responsible for one third of the observed average net markup, and a quarter of its dispersion. We next study the optimal linear taxation/subsidization of advertising. We find that the optimal tax is quite high, yet finite, which serves to simultaneously increase dynamic efficiency and raise revenue, while still maintaining most of the benefits of advertising in the form of reduced misallocation, without the excessive spending due to the advertising rat race.