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Optimal Advertising Rules when Advertising acts as a Capital good

Published online by Cambridge University Press:  17 August 2016

D.A. Peel
D.A. Peel*
Affiliation:
University of Liverpool
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Extract

Recent papers by Steinherr [6], Vanek [7] and Ireland and Law [3] have been concerned with the question as to whether profitmaximising firms (C-firms) advertise more than labour-managed firms (LM firms). Ireland and Law follow the approach suggested by Dorfman and Steiner [2] and examine the price and advertising elasticities of the demand function. Within this framework Ireland and Law show that α/H = n/ε is a necessary optimising condition for both the C-firm and the LM-firm.

where α is sales promotion

H is total revenue

ε is the price elasticity of demand (times — 1)

n is the elasticity of demand with respect to sales promotion.

Consequently, in the particular case where the demand curve facing the firm can be locally approximated by a constant elasticities function, both firms will have the same α/H ratio. In the more general case the outcome is ambiguous.

Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 44 , Issue 2 , June 1978 , pp. 217 - 219
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1978 

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References

[1] Ames, E. Soviet Economic Processes, Richard D., Irwin 1965, pp. 50–65.Google Scholar
[2] Dorfman., R. and Steiner, P.O. « Optimal Advertising and Optimal Quality » American Economic Review, 44. (December 1954).Google Scholar
[3] Ireland, N.J. and Law, P.J. « Advertising and The Labour Managed Firm » The Journal of Industrial Economics, Vol. XXV (March 1977).Google Scholar
[4] Nerlove, M. and Arrowe, K., « Optimal Advertising Policy under Dynamic Conditions » Economica, (May 1963).Google Scholar
[5] Peel, D.A. « The None-uniqueness of the Dorfman-Steiner condition: A Note » Economica, 40 (May 1973).Google Scholar
[6] Steinherr, A. « Profit-maximising vs. Labour-Managed Firms: a comparison of Market Structure and Firm Behaviour » The Journal of Industrial Economics, 24 (December 1975).Google Scholar
[7] Vanek, J. The General Theory of Labour-managed Market Economics (Cornell University Press, Ithaca, 1970).Google Scholar