The Impact of Manufacturer Advertising on Retail and Wholesale Margins

By Rajiv LalChakravarthi Narasimhan
1994| Working Paper No. 1306

In this paper we explore the relationship between brand advertising and wholesale and retail margins. We show that when the retail market is characterized by oligopolistic competition, higher level of brand advertising by a manufacturer can lead to lower retail margins while at the same time increasing the brand’s wholesale margin. We show that this effect persists even under oligopolistic competition at the wholesale level (i.e., at the manufacturer level). This result is in stark contrast to the traditional derived demand theory and we elaborate on the causes of this deviation.

firm behavior