Do Firms Price and Advertise to Maximize Profits? Evidence from U.S. Food Industries

Based on a model that incorporates brand entry deterrence through advertising and pricing strategies, this paper investigates whether firms’ advertising and pricing policies deviate from their short-run profit maximization strategies and how advertising and pricing entry deterrence strategies vary with market conditions. We estimate the advertising and pricing response of incumbents to entrants in four food industries: beer, carbonated soft drinks, ready-to-eat cereal and yogurt, and find that incumbents deviate significantly from profit maximization advertising and pricing policies. There is a U-shaped relationship between the potential market share of an entrant and incumbents’ pricing but an inverse U-shape with respect to advertising level. This means that incumbents are more likely to price higher and advertise less to deter entry when potential entrants are more competitive in terms of potential market share. Empirically, we show this to be the case in the four food industries studied.


Issue Date:
2016
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/235436
Page range:
3-22
Total Pages:
22
JEL Codes:
L11; L21; M37




 Record created 2017-04-01, last modified 2017-08-29

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