Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

Part Six

Non-Price Competition

So far, most of our analysis has focused on interfirm competition centered on quantity or price. However, firms compete in many other dimensions, as well. Two such competitive mechanisms are advertising and innovative effort. These are the topics addressed in Part Six.

Advertising has long been an issue of both academic and popular concern. Initially, economists focused on the use of advertising to build brand loyalty and thereby to soften price competition between different brands. However, subsequent analysis has focused on the informational role of advertising. By helping consumers learn what alternatives are available and at which prices, by informing consumers about the appropriate uses of a new product and its overall quality, and in numerous other ways, advertising can play a useful role in improving the welfare of both producers and consumers. In Chapter 19 we examine many economic models of advertising. We also present Ackerberg's (2001) empirical paper offering evidence on the critical role that advertising plays as information regarding what products are being sold and what their critical features are.

In Chapter 20, we consider the general issues of innovation and Schumpeterian competition. Chapter 20 begins with a presentation of a well-known set of propositions typically referred to jointly as the Schumpeterian hypotheses. This is that large firms and concentrated industries are necessary for technological innovation. This chapter explicitly ...