THECOMPOSITIONDISTORTIONINADVERTISING COMPETITION: AFREE-RIDERTHEORYOFPERSUASIVEADVERTISING

Abstract

This thesis studies a theoretical problem in advertising competition: firms do not merely choose how much to advertise; they also choose what kind of advertising to produce. Traditional contest models treat advertising as persuasive and redistributive, where firms fight for a fixed market and symmetric efforts cancel out. The informative view of advertising, in contrast, treats advertising as a mechanism that informs con sumers and expands total market demand. In real markets, however, advertisements usually contain both components. A pharmaceutical advertisement may inform pa tients about a treatment and its risks while simultaneously persuading them to prefer one brand. A search advertisement may match high-intent users to a product while also competing against rival advertisers. The central question of this thesis is there fore: what happens when firms endogenously choose both advertising intensity and advertising composition? The thesis develops a duopoly advertising contest in which each firm chooses ad vertising intensity and the fraction of its advertising that is informative. The persuasive component shifts market share in a zero-sum contest, while the informative component expands total demand as a positive-sum spillover. The main result is that, under a broad and economically meaningful parameter range, private equilibrium advertising is biased toward persuasive content. The reason is a free-rider problem: a firm captures the full private benefit of persuasive advertising through market-share gains, but it captures only part of the benefit of informative advertising because demand expansion also helps competitors. This creates a composition distortion: firms may spend a large amount on advertising, but the composition of that spending is socially inefficient. The thesis distinguishes this composition distortion from ordinary rent dissipation and over-advertising. It then studies a policy instrument: a minimum informative content mandate. The analysis shows that such a mandate can improve welfare by redirecting competitive pressure from share-stealing persuasion toward socially valu able information. Theoptimalmandateisnotnecessarilyfullinformation. Ifpersuasive vi incentives are eliminated completely, firms may reduce advertising intensity so much that the total information delivered to consumers falls. The welfare-maximising policy is therefore an interior composition mandate that harnesses competition rather than eliminating it. Thethesisfurtherextendsthemodeltoan 𝑁-firmsetting, showingthatthefree-rider problem becomes stronger as the number of firms increases because each firm captures a smaller fraction of the market-expansion benefit. It also discusses robustness under a ratio-form contest success function, provides numerical simulations, and connects the theory to pharmaceutical advertising regulation, FDA fair-balance requirements, FTC substantiation rules, and EU unfair commercial practices law. The contribution of the thesis is to show that the policy problem in advertising competition is not always excessive quantity alone. Sometimes the deeper market failure is that firms produce the wrong composition of advertising.