Abstract

Consider a marketing division of a monopoly firm that faces two marketing options: Market enlargement and elasticity improvement. These options are conceived in terms of the target of the firm’s advertising campaigns: Potential new consumers versus existing consumers. Using a CES demand function in a simple model, we demonstrate that the two activities are complementary, so that for some cost configurations, the firm will find it profitable to implement the two options together when either option alone would result in a loss. This calls for the marketing division to be integrated, rather than decentralized.