Optimal Commodity Advertising in Bilateral Oligopoly

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.