Abstract

We consider a differentiated oligopoly where firms compete a la Cournot in the market phase, and each firms may invest in advertising activity, to enlarge its market size. Each firm`s advertising effort has positive external effects on the market size of all rivals. We derive the open-loop (and the coincident closed-loop) Nash equilibrium, and the optimal behavior of a cartel involving all firms setting both quantities and advertising efforts so as to maximize joint profits. The comparative assessment of these equilibria shows that a cartel may produce a steady ste where social welfare is higher than the social welfare level associated wit the non-cooperative setting. This is due to the positive externalities from advertising activity.