Three essays on the economics of advertising

Goswami, Sriparna

Three essays on the economics of advertising

File

Goswami_iastate_0097E_21634.pdf (2.63 MB)

Date

2024-08

Authors

Goswami, Sriparna

Advisor

Kim, Donghyuk

Cordoba, Juan Carlos

Harris-Lagoudakis, Katherine

Moschini, GianCarlo

Zhang, Wei

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Abstract

This dissertation explores critical aspects of advertising and competition in the U.S. craft beer market through three comprehensive studies, integrating theoretical insights and empirical analysis to provide a nuanced understanding of market dynamics. In Chapter 2, we develop a theoretical model to investigate how firms use informative advertising in a market where consumers are not fully aware of all available products. The model reveals that firms have an incentive to under-advertise to avoid intensifying competition, which can lead to higher prices and reduced consumer welfare. The findings highlight the potential inefficiencies caused by strategic under-advertising and suggest that collective marketing efforts by trade associations could mitigate these effects. In Chapter 3, we provide empirical evidence of strategic under-advertising using data from the craft beer market. Using weekly brand-level advertising expenditure data for 84 craft breweries from 2016 to 2019 and leveraging the spatial discontinuity in the dissemination of advertisements, we find that firms advertise less aggressively in more competitive markets. The results indicate that firms indeed engage in under-advertising to avoid competition. Specifically, a craft brewer’s sensitivity to rival advertising decreases as the number of competitors increases. A monopolist is estimated to advertise 2.1% less if a competitor entered to create a duopoly market, and a duopolist would advertise 0.4% more if its rival advertises 1% more, suggesting that firms strategically limit their advertising to maintain higher profit margins. In Chapter 4, we examine the spillover effects of advertising by large, mass-producing beer brands on the entry of craft breweries. Using a detailed dataset of advertising expenditures and market entry data, the empirical strategy leverages variations in advertising exposure across different markets and over time. The results show that mass producers' 1% increase in advertising expenditure leads to a 0.15% increase in the number of new craft breweries entering the market. Conversely, craft breweries' advertising does not significantly impact new entries, indicating that other factors, such as local market conditions and word-of-mouth, are more critical in driving craft brewery growth. These three studies collectively enhance our understanding of the complex interplay between advertising strategies and market competition in a growing market like the craft beer industry. By integrating economic theory with empirical methods, the dissertation provides valuable insights that can inform industry practices and policy decisions aimed at fostering a competitive and vibrant craft beer market.

Academic or Administrative Unit

Department of Economics (LAS)

Type

dissertation