Abstract
We compare the equilibrium outcome when firms collude on advertising (and compete on prices) to the Nash equilibrium outcome in the Grossman and Shapiro (1984) model of informative advertising. It is shown that advertising is lower but prices and profits are higher under semicollusion on advertising. We also show that semicollusion on advertising is detrimental to welfare. Although firms earn higher profits when they semicollude on advertising, fewer consumers are informed, and as a result, welfare is lower. We also contrast semicollusion on price to semicollusion on advertising. We find that, in general, semicollusion on price is not associated with higher profits than under semicollusion on advertising. When the advertising cost is low, semicollusion on price is more profitable while semicollusion on advertising yields higher profits when the advertising cost is high.