Pricing and persuasive advertising in a differentiated market
- 964 Downloads
This paper examines the effects of consumer preferences, firms’ costs, and advertising efficiencies on firms’ pricing and persuasive advertising strategies. We show that as the firms’ horizontal differentiation increases, the firm with a lower value-added product tends to increase persuasive advertising, whereas its competitor tends to reduce advertising. Second, the firm receiving a favorable shock in product valuation will complement the favorable change with additional persuasive advertising rather than reduce advertising spending. Third, an equal improvement in advertising efficiency in the industry will lower the profits for both firms, whereas a decrease in advertising efficiency in the industry can benefit both firms. Fourth, a larger shock that improves a firm’s product valuation or unit cost is more likely to induce higher advertising spending in the industry. Lastly, an exogenous increase in the separation between firms’ product valuations or perceived qualities may actually reduce the price dispersion in the industry.
KeywordsCompetitive strategy Persuasive advertising Pricing Product differentiation Competition Game theory
- Bagwell, K. (2007). The economic analysis of advertising. M. Armstrong, R. Porter (eds). Handbook of industrial organization, Vol. 3, Chapter 28. North-Holland, Amsterdam.Google Scholar
- comScore. (2007). The Kelsey Group. “Online consumer-generated reviews have significant impact on offline purchase behavior.” comScore Press Release.Google Scholar
- Hermalin, B. (1993). Notes on microeconomics. Berkeley: University of California.Google Scholar
- Tirole, J. (1988). The theory of industrial organization. Cambridge: MIT.Google Scholar