Generic Advertising of Intermediate Goods: Theory and Evidence on Free Riding

Generic Advertising of Intermediate Goods: Theory and Evidence on Free Riding We develop a model of generic advertising in the context of vertically dependent markets wherein producers of an intermediate good financially support, through voluntary contributions, a generic advertising campaign aimed at consumers of a final product. The Nash equilibrium is characterized by free riding on the part of upstream firms because of the nature of generic advertising, leading to its underprovision with respect to joint, industry-wide profit maximization. We test the model in the U.S. fluid milk industry focusing on the effects of generic advertising on the intermediate demand for milk, since dairy farmers support the generic advertising. Taking this approach, we find that generic advertising had a positive influence on farm-level demand for milk, but did not achieve joint profit maximization. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

Generic Advertising of Intermediate Goods: Theory and Evidence on Free Riding

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2002 by Kluwer Academic Publishers
Subject
Economics; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
D.O.I.
10.1023/A:1015069023770
Publisher site
See Article on Publisher Site

Abstract

We develop a model of generic advertising in the context of vertically dependent markets wherein producers of an intermediate good financially support, through voluntary contributions, a generic advertising campaign aimed at consumers of a final product. The Nash equilibrium is characterized by free riding on the part of upstream firms because of the nature of generic advertising, leading to its underprovision with respect to joint, industry-wide profit maximization. We test the model in the U.S. fluid milk industry focusing on the effects of generic advertising on the intermediate demand for milk, since dairy farmers support the generic advertising. Taking this approach, we find that generic advertising had a positive influence on farm-level demand for milk, but did not achieve joint profit maximization.

Journal

Review of Industrial OrganizationSpringer Journals

Published: Oct 13, 2004

References

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