Second-best optimality of advertising when monopoly is sanctioned

Monopoly pricing is sanctioned by government in a variety of cases (e.g., patent policy). We derive necessary and sufficient conditions on preferences determining when monopolists choose socially optimal, excessive, or inadequate advertising conditional on monopoly pricing behavior. We then derive the behavioral implications of these conditions in an empirically tractable framework that is estimable with typical observable data.

► Monopoly pricing can be socially optimal. ► Conditional on monopoly pricing, advertising is excessive, optimal, or insufficient as a key elasticity is greater, equal to, or less than one. ► Social optimality of advertising can also be characterized simply in terms of preferences. ► The paper concludes with the quasi-linear utility function consistent such that monopoly advertising is socially optimal.