For discussion purposes, television advertising can be broken up into four stages. The first stage involves each TV channel choosing its quantity of advertising and a programming schedule. A TV channel’s profit is the difference between its revenue from advertising and costs of investments in programming. The goal is to maximize profits by determining how much advertising to allocate and which programs to broadcast. In the next stage, each producer determines how much to advertise on a specific TV channel. An advertising firm looks at viewer demographics and audience size when deciding which channel and commercial to use to realize the most benefits. The viewer then decides whether or not to watch TV and, if so, which TV channel to watch. They make their decision after the TV channel and producer have already completed their advertising decisions. Finally, the producers compete in the product market by advertising and differentiating their products. The goal is to distinguish their product from others. By making price less of a factor than product differences, producers participate in non-price competition (McConnell Brue 230).
We are now in a position to investigate how the equilibrium outcome detailed in Section 2 is affected by a change in the number of advertisers, n. This number may increase, either through an increase in the number of firms in each market, i.e., a decrease in market concentration throughout the economy, or through an increase in the number of product markets. Total spending on advertising increases as a result of a reduction in the number of firms, keeping constant the number of product markets. A reduction in the number of firms makes each remaining firm more concerned about the fact that own advertising tends to reduce the number of viewers. This dampens the incentive for each firm to increase advertising and would, all else equal, result in