Handbook of Media Economics, vol 1A

We turn now from marginal revenue to costs. We model costs as depending on the

endogenous variables and on a vector of cost shocks, ω

t

, with one shock for each decision.

As an example somewhat in the spirit of

Fan (2013), we could model costs as

C ¼q

t

mc a

t

, y

t

, θ

q

ðÞ+ ω

q

½+ F

a

a

t

, θ

a

ðÞ+ ω

a

a

t

½+ F

y

y

t

, θ

y

ðÞ+ ω

y

y

t

½: (3.24)

The first term is quantity times marginal cost, where marginal cost varies with advertise-

ments and quality as well as a parameter vector and a cost shock. The second term in

brackets is the fixed cost of selling and producing advertisements, also depending on a

parameter and a cost shock. The third term is the fixed cost of quality. ...