Advertising And Its Effect On Corporate Performance

This paper offers a comprehensive survey of advertising. A first objective is to analysis the process of advertising decision. A second objective is to clarify the effects of advertising.The theoretical model is based on Ishigaki(2000).In this model,we derive the equilibrium in different circumstances and examine the companies’ performance. The paper showsthat the market size plays a catalytic role in profit promotion.We also find that in the advertising game whose post advertising competition is Bertrand, the profit-increasing effect of advertising decreases as the rising of advertising intensity, when the ratio of costs and discount rates satisfy certain conditions; the profit-maximizing advertising intensity exists. We study the deter entry effect of advertising as well. Four factors are considered to affect the expected profit during the post-entry period. Compared with monopoly, duopoly advertising is excessive.Two hypothesizes are put forward. The first, whether a company will advertise is ‘self-selected’. The second, the correlation between advertising intensity and profit has a nonlinear character, a threshold effect may exist. We examine these hypothesizes in five industries using endogenous switching regression model(ESR) and panel data threshold regression model in chapter four.The endogenous switching regression reveals that advertising is profit-increasing in all the five sample industries. Inalcoholic beverage, food and pharmaceutical industry, the effect is significant. The other discovery is the existence of self-selection. There are unobserved differences between advertisers and non-advertisers. The analysis of the threshold effect can be summed up in two points. First, there is “single threshold effect” in detergent, food, soft drinks and pharmaceutical industry. In alcoholic beverage industry, “double threshold effect” is reported. All the threshold effects are significant. Second, the profit-increasing effect decreases with the rising of advertising intensity in alcoholic beverage, food and pharmaceutical industry. For detergent and soft drinks manufacturers, when advertising intensity is above the threshold, there is a negative correlation between advertising and profit. We can conclude that in detergent and soft drinks industry, an optimal advertising intensity exists which can maximize the profit of a company.Policy recommendations are put forward based on theoretical analysis and empirical test results.