On advertising durability and product durability

Abstract

This paper uses a simple two-period model to examine the behaviour of a monopolist who produces a durable good and engages in advertising that is also somewhat durable. It is found that changes in product durability and advertising durability have opposite effects on profit-maximizing output and advertising. Policy implications for antitrust and health regulation are discussed.

Acknowledgements

The author thanks James Payne for helpful comments. Remaining errors are the author's.

Notes

¹ To place an upper bound on profit-maximizing advertising, we require that the marginal advertising costs rise more sharply than the marginal benefit of advertising, i.e. h′′ > (∂² P ₁/).

² The advertising we consider may be viewed more of a market expanding nature. Another possibility may be to have the price elasticity be directly affected by advertising.

³ The product durability is exogenous in this model. We abstract from the monopolist's sale-lease dilemma to focus on the effects of durability changes (Bulow, 1986). The sale-lease dilemma seems more relevant in the case of endogenous durability choice.

⁴ Product durability may alternatively be strategically chosen by the firm (Bulow, 1986).