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The Center for the Study of Complex Systems pres.

Complex Systems Seminar | A Minimal Mathematical Model for Free Market Competition Through Advertising

Joseph Johnson Northwestern University, Department of Engineering; Engineering Sciences & Applied Math

Joseph Johnson Joseph Johnson
Joseph Johnson
Firms in the U.S. spend over 200 billion dollars a year advertising their products to consumers, around 1 percent of the country's gross domestic product. It is of great interest to understand how that aggregate expenditure affects prices, market efficiency, and overall welfare.

Here, we present a mathematical model for the dynamics of competition through advertising and find a surprising prediction: when advertising is relatively cheap compared to the maximum benefit of advertising, rational firms split into two groups, one with significantly less advertising (a "generic'' group) and one with significantly more advertising (a "name-brand'' group).

We use consumer data to compare predictions from the model with real world pricing and advertising data and find qualitative agreement. We also show that having products be differentiated by advertising is not always best for total profit or total welfare in an industry.
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