The Composition Distortion in Advertising Competition

Advertising can redistribute market shares and expand aggregate demand. We study a duopoly in which firms choose both total advertising effort and the fraction devoted to information. Persuasive effort determines market shares through a clipped linear contest, while informative effort expands the revenue available to both firms. We characterize conditions under which firms choose purely persuasive advertising even though the planner allocates all effort to information. On a specified parameter domain, a minimum informative-content requirement yields a unique pure equilibrium, and a suitable requirement produces higher welfare than every pure effort cap. We also derive sufficient conditions for an interior welfare-maximizing requirement; full information is optimal in some other parameter regimes. In a numerical illustration, the optimal requirement raises welfare from 110 to 159.10, compared with 150 under an advertising ban and 162.66 at the first best. A repeated-game illustration shows that the relationship between content requirements and collusion can be nonmonotone when the cartel chooses its advertising composition. The analysis characterizes a continuous composition requirement within the established literature on advertising, public goods and coopetition contests.