Advertising in Vertical Relationships : An Equilibrium Model of the Automobile Industry

I develop and estimate a model of pricing and advertising decisions of new car manufacturers and dealers. The model highlights a selling effort externality between dealers and manufacturers, which leads to estimated manufacturer markups that are about half compared to those from a model that does not endogenize advertising in the vertical relationship. I quantify the welfare effects of state regulations that restrict wholesale contracts by simulating the adoption of a franchise fee contract. I predict a 10% decrease in prices, an 8% increase in dealer advertising, and substantial gains in consumer welfare compared to the current linear price contract