Does Manufacturer Advertising Crowd‐in or Crowd‐out Retailer Advertising? An Application of an Endogenous Prize Contest with Asymmetric Players

Abstract

When a manufacturer advertises, what is the impact on retailer advertising? I analyze a contest model of advertising where total advertising by the manufacturer and by retailers determines market size, and the relative level of advertising by each retailer determines market share. If retailers are symmetric I show that there is a crowding-in effect so increased manufacturer advertising increases retail advertising. But if one retailer is stronger, then marginal increases in manufacturer advertising have a crowding-out effect on retailer advertising, while sufficiently large increases have a crowding-in effect by "jump-starting" competition between retailers for the larger market. Furthermore, asymmetric abilities in such contests can lead the weaker player to effectively drop out of the contest, thereby undermining the ability of increased prizes to increase effort by intensifying competition.

Asymmetric endogenous prize contests

“…Baye et al (2012) assume 1 Broader examples of productive contests from the legal profession, financial markets, industrial organization, and the entertainment industry are presented in Chung (1996). A more recent application of an endogenous value contest to advertising is developed in Ridlon (2016).…”

“…Standard ways to account for asymmetries are either to assume differences in players' (constant) marginal costs (see, e.g. Baik, 1994or Ridlon, 2016 or in head-starts (see, e.g. Siegel, 2009).…”

“…It allows for a general representation of the cost function but still affords equilibrium and comparative statics analysis. A model of a productive contest with asymmetric, but linear cost functions, is developed by Ridlon (2016) in the context of advertising campaigns. The constant marginal cost assumption could lead to equilibrium outcomes in which only one of the players is advertising (monopoly case) -an equilibrium outcome observed in the case of strong asymmetries.…”