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Comsumption Externalities, Coordination, and Advertising

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  • Ivan Pastine

    (Bilkent University, Turkey, and CEPR)

  • Tuvana Pastine

    (Bilkent University, Turkey, and CEPR)

Abstract

The aim of this article is to demonstrate that advertising can have an important function in markets with consumption externalities apart from its persuasive and informative roles. We show that advertising may function as a device to coordinate consumer expectations of the purchasing decisions of other consumers in markets with consumption externalities. The implications of advertising as a coordinating device are examined in the pricing and advertising decisions of firms interacting strategically. Although, at times, the one-period advertising expense can exceed the one-period monopoly profit, in equilibrium, consumers will pay a premium for the more heavily advertised brand. Copyright Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 43 (2002)
Issue (Month): 3 (August)
Pages: 919-943

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Handle: RePEc:ier:iecrev:v:43:y:2002:i:3:p:919-943

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References

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  1. Becker, Gary S & Murphy, Kevin M, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 941-64, November.
  2. Gary S. Becker, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," University of Chicago - George G. Stigler Center for Study of Economy and State 67, Chicago - Center for Study of Economy and State.
  3. Wolfgang Pesendorfer, 1993. "Design Innovation and Fashion Cycles," Discussion Papers 1049, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
  5. Ivan Pastine & Tuvana Pastine, 2000. "Coordination in Markets with Consumption Externalities : The Role of Advertising and Product Quality," Departmental Working Papers 0003, Bilkent University, Department of Economics.
  6. S. W. Davies & Paul A. Geroski, 2000. "Changes In Concentration, Turbulence, And The Dynamics Of Market Shares," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 383-391, August.
  7. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  8. Baye, M.R. & Kovenock, D. & De Vries, C.G., 1992. "Rigging the Lobbying Process: An Application of the All- Pay Auction," Papers 9-92-2, Pennsylvania State - Department of Economics.
  9. Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-23, March.
  10. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-86, May.
  11. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October.
  12. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June.
  13. Porter, Michael E, 1976. "Interbrand Choice, Media Mix and Market Performance," American Economic Review, American Economic Association, vol. 66(2), pages 398-406, May.
  14. Kyle Bagwell & Garey Ramey, 1990. "Advertising and Coordination," Discussion Papers 903, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
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Citations

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Cited by:
  1. Brekke, Kjell Arne & Rege, Mari, 2006. "Advertising as Distortion of Learning in Markets with Network Externalities," Memorandum 24/2006, Oslo University, Department of Economics.
  2. Pastine, Ivan & Pastine, Tuvana, 2005. "Coordination in Markets with Consumption Externalities: The Role of Advertising and Product Quality," CEPR Discussion Papers 5152, C.E.P.R. Discussion Papers.
  3. Friedrichsen, Jana & Engelmann, Dirk, 2013. "Who cares for social image? Interactions between intrinsic motivation and social image concerns," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79746, Verein für Socialpolitik / German Economic Association.
  4. C. Robert Clark & Ignatius J. Horstmann, 2004. "Advertising and Coordination in Markets with Consumption Scale Effects," CIRANO Working Papers 2004s-35, CIRANO.
  5. Caulkins, Jonathan P. & Hartl, Richard F. & Kort, Peter M. & Feichtinger, Gustav, 2007. "Explaining fashion cycles: Imitators chasing innovators in product space," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1535-1556, May.
  6. Maria Alipranti & Emmanuel Petrakis, 2012. "Comparative Advertising in Markets with Network Externalities," Working Papers 1306, University of Crete, Department of Economics, revised 08 May 2013.
  7. Kretschmer, Tobias & Rösner, Mariana, 2010. "Increasing Dominance - the Role of Advertising, Pricing and Product Design," Discussion Papers in Business Administration 11500, University of Munich, Munich School of Management.
  8. repec:dgr:uvatin:2011016 is not listed on IDEAS
  9. Friedrichsen, Jana, 2013. "Image concerns and the provision of quality," Discussion Papers, Research Unit: Market Behavior SP II 2013-211, Social Science Research Center Berlin (WZB).
  10. Pastine, Ivan & Pastine, Tuvana, 2012. "Incumbency advantage and political campaign spending limits," Journal of Public Economics, Elsevier, vol. 96(1), pages 20-32.
  11. Henk Folmer & Auke Leen, 2013. "Why do successful restaurants not raise their prices?," Letters in Spatial and Resource Sciences, Springer, vol. 6(2), pages 81-90, July.

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