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Advertising and Cost Reduction

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Abstract
The empirical literature on internalization has found a positive relationship between advertising intensity and foreign direct investment. The model presented in this paper explains this evidence by a technological change in the communications environment and makes predictions for other cost-reducing investments. We consider a market in which a single producer launches a new product. At first potential buyers are unaware of the product and its price, and the producer decides the optimal advertising strategy. We find that both advertising spending and investment in per unit cost reduction are higher under targeting than under mass advertising when the advertising technology exhibits marginal economies of targeting.

Suggested Citation

  • Giovanni Immordino, 2007. "Advertising and Cost Reduction," CSEF Working Papers 177, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:177
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    File URL: http://www.csef.it/WP/wp177.pdf
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    References listed on IDEAS

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    1. Susan Athey & Armin Schmutzler, 1995. "Product and Process Flexibility in an Innovative Environment," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 557-574, Winter.
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    Cited by:

    1. Sizhong Sun, 2014. "Foreign Entry and Firm Advertising Intensity: Evidence from China," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 45(1), pages 79-97, August.

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    More about this item

    Keywords

    Informative advertising; Targeting; Foreign Direct Investment; Cost reduction;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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