Advertising and firm Value- Prisoner's Dilemma??

We are constantly bombarded by advertisements. Ads urge us to buy all and sundry. Something to be probed is the motives behind advertising by the firms. further is the question about the success of the motives. Conventional literature suggests AIDA model. it suggests the impact of advertising in terms of Attention, Interest, Desire and Action. Does Advertising result in action or merely creates an attention and probably a degree of interest. One of my papers attempts to measure impact of advertising on firm value. We believe, if advertising has to succeed, it should increase firm value. We measure firm value by Tobin's Q. the full paper is found here.  The results are in a way surprising. Except for banking and financial services and consumers, hypothesis that advertising does not influence firm value cannot be rejected. If advertising does not influence firm value, why firms go on a spending spree. Estimates suggested advertising in India is to the tune of around Rs. 30,000 crores. Yet we do not find an impact on firm value. A leading FMCG firm posed me a question on this. What I present here is an analysis of the possible answer. 

We take refuge in Game theory and Prisoner's Dilemma. Let us assume only two companies exist. If both do not advertise neither get benefit nor they lose anything. they maintain a status quo. if one advertises, creating an awareness will result in significant benefits for the firm. If both advertise in equal quantities status quo remains. So here is a race. Each company outbids another thus resulting in higher stakes. The other firm faced with survival follows suit. For both no doubt involves huge costs. But not advertising may result in a death sentence. Collectively all are better off by prior agreement to advertise to a certain extent. The desire to individually perform better results in collective worsening.

Diagrammatically, it is represented below.

 

	Firm A Ad Spending Low                                     →           High
Firm B                                                     Low                             Ad Spending                                                               ↓                                                               High	Collectively better off	‘A ‘ likely to be better off over ‘B’
	‘B’ to be better off over ‘A’	Both worse off

 let us see what happens as firms try to outscore one another. We dig into the theory of production. Production theory suggests that as firms employ the same input, a point will be reached wherein any increase in the input will result in diminishing of the total output or in other words, negative marginal product. The law of diminishing returns  (Advertising as an input with firm profitability or even firm value as output) will start operating thus the results. So does advertising in Indian firms is a case of Prisoner's Dilemma accompanied by diminishing returns? Maybe prima facie, it seems a matter of investigation.