OLIGOPOLISTIC PRICING AND ADVERTISING

N sellers advertise a homogeneous good to M buyers whose only source of information is this advertising. There is a unique Nash Equilibrium (NE) in which sellers choose a common advertising level and mix over prices. This NE approaches marginal cost priing as advertising costs decrease, and approaches monopoly pricing as advertising costs increase. More sellers induce lower prices and less advertising per seller; however, the social welfare effect can be negative for some advertising technologies. The NE advertising level is generically less than socially optimal.