Lukas Nord from the University of Pennsylvania will present “Investment in Demand and Dynamic Competition for Customers” (joint with Joachim Hubmer)

Abstract: How demand is allocated across firms is a central determinant of aggregate productivity. Firms affect this allocation through their pricing and their spending on sales and marketing—investment in demand. We develop a framework in which investment in demand shapes allocations directly, by matching customers to suppliers, and indirectly, by altering price competition. A quantitative version generates rich industry dynamics and matches salient empirical facts on how firms compete for customers. We highlight two main results: First, firms over-invest in marketing due to a business-stealing externality. A social planner would reduce aggregate marketing spending by 22%. Second, marketing has a pro-competitive effect, mitigating the welfare cost of imperfect competition. Equilibrium interactions of marketing and pricing create complementarities between policies that target over-investment in demand and markup distortions. Quantitatively, the observed increase in marketing since the 1980s can account for the observed rise in industry concentration without raising market power, while boosting productivity and GDP.