Advertising in Vertical Relationships: An Equilibrium Model of the Automobile Industry

Abstract

I estimate a model of demand for new cars and equilibrium pricing and advertising decisions of dealers and manufacturers. The estimated split of surplus between dealers and manufacturers diers from a model without advertising decisions because of a public goods advertising externality within the vertical relationship. I predict firm and consumer behavior if two state franchise regulations change. First, allowing vertical integration leads to 20% lower retail prices and 30% greater advertising. Second, manufacturers are currently restricted from closing dealers and I predict that manufacturers would substantially decrease brand advertising after dealer closures are allowed. Remaining dealers of the same brand can be worse o, even though they face less intrabrand competition.