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. More generally the model can be applied to other contests such as patent races or promotion tournaments where not just the probability of winning but also the value of winning depends on contest effort levels.