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This paper exploits a unique panel of 59,000 French firms over 1990-2004 to investigate the interactions between R&D, advertising and the competitive environment. The empirical findings confirm the predictions of a dynamic model that complements results known in static frameworks. First, more competition pushes Neck and Neck firms to advertise more to attract a larger share of consumers on their products or services. Second, for a given competitive environment, quality leaders spend more in advertising in order to extract maximal rents; thus, lower costs of ads may favor R&D.
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