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Advertising, brand loyalty and pricing

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Chioveanu, Ioana

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Abstract

I consider an oligopoly model where, prior to price competition, firms invest in persuasive advertising and induce brand loyalty in consumers who would otherwise buy the cheapest alternative on the market. This setting, in which persuasive advertising is introduced to homogeneous product markets, provides an alternative explanation for price dispersion phenomena. Despite ex ante symmetry, the equilibrium profile of advertising outlays is asymmetric. It follows that endogenously determined brand loyal consumer bases are not symmetric across firms. This raises a robustness question regarding Varian's "model of sales" where symmetry is exogenously assumed.

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Publisher Info
Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 64 (2008)
Issue (Month): 1 (September)
Pages: 68-80
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Handle: RePEc:eee:gamebe:v:64:y:2008:i:1:p:68-80

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Web page: http://www.elsevier.com/locate/inca/622836

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Related research
Keywords: Oligopoly Advertising Price dispersion Brand loyalty;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
  2. Loewenstein, George, 2001. " The Creative Destruction of Decision Research," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 28(3), pages 499-505, December.
  3. Nelson, Jon P & Moran, John R, 1995. "Advertising and US Alcoholic Beverage Demand: System-Wide Estimates," Applied Economics, Taylor and Francis Journals, vol. 27(12), pages 1225-36, December.
  4. Metwally, M M, 1976. "Profitability of Advertising in Australia: A Case Study," Journal of Industrial Economics, Blackwell Publishing, vol. 24(3), pages 221-31, March. [Downloadable!] (restricted)
  5. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December. [Downloadable!]
  6. Schmalensee, Richard, 1976. "A Model of Promotional Competition in Oligopoly," Review of Economic Studies, Blackwell Publishing, vol. 43(3), pages 493-507, October. [Downloadable!] (restricted)
  7. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Blackwell Publishing, vol. 53(1), pages 1-26, January. [Downloadable!] (restricted)
  8. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May. [Downloadable!] (restricted)
  9. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September. [Downloadable!] (restricted)
  10. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," Journal of Business, University of Chicago Press, vol. 61(4), pages 427-49, October. [Downloadable!] (restricted)
  11. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Il-Horn Hann & Kai-Lung Hui & Sang-Yong Tom Lee & Ivan P.L. Png, 2005. "Sales and Promotions: A More General Model," Industrial Organization 0508014, EconWPA. [Downloadable!]
  2. Il-Horn Hann & Kai-Lung Hui & Sang-Yong Tom Lee & Ivan Png, 2005. "Consumer Privacy and Marketing Avoidance," Industrial Organization 0503009, EconWPA. [Downloadable!]
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