Research
Research
Advertising Contests and Variable Markups in a CES Framework
Abstract
Over the last 30 years, markups as well as advertising expenses have increased substantially. Moreover, advertising expenditures and markups are positively correlated with the business cycle in the data, a feature that standard models of monopolistic competition based on Dixit-Stiglitz have found difficult to obtain. I introduce a model that adds endogenous market expansion choice (through product marketing) for firms to an otherwise standard monopolistic competition model. I model marketing by heterogeneous firms as a contest in which firms can shift the demand of the variety they produce, but also suffer from other firms engaging in the same activity. In the model's equilibrium, product marketing and pricing decisions interact with each other, altering markups proportional to the level of marketing expenditures by individual firms. This is another result that many empirical studies find. The model also creates a link between total factor productivity and markups through investments in product marketing. I find that markups and market concentration depend on the variance of total factor productivity. I also illustrate how the elasticity of substitution in an industry can affect the markup distribution.Abstract
We analyze a theoretical model in which entrepreneurs' property rights are threatened by "raiders" who can challenge them to a contest for control of their firms. Entrepreneurs have heterogeneous productivity, and decide how much capital to invest before raiders decide whom to attack. In equilibrium, low productivity entrepreneurs are unaffected by the existence of raiders, while mid- and high-productivity entrepreneurs suffer. However, while raiders essentially act like a tax for the highest productivity entrepreneurs, the investment behavior of mid-productivity entrepreneurs who try to avoid an attack is more drastically affected. Our model provides a novel theoretical explanation for the "missing middle" observed in many countries with insecure property rights.Abstract
In standard New Keynesian models growth rate of the economy is assumed to be exogenous and out of the scopes of monetary authority's control. In this paper I suggest a framework where growth rates are stochastic and determined in the economy from the investment levels. The investments are done by firms who carry costs from price adjustments. Under this setup I find that inflation and monetary shocks have considerably large impact on growth rates of the economy. Thereby I suggest that monetary policy should consider the channel of transmission through growth rate.