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Questioning Conventional Wisdom About Competition in Differentiated Markets

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  • David Soberman

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    Abstract

    Managerial texts are full of conventional wisdom about competitive markets. Examples of such wisdom include the following ideas: (a) for success, differentiation is a strategic imperative, (b) the viability of a firm is seriously threatened when a competitor is significantly better at reaching and communicating with potential consumers and (c) premium pricing in a market with low levels of differentiation is often evidence of collusive behaviour. These ideas are based on analysis where consumers are assumed to have complete and accurate information about the important alternatives in a category. The objective of this paper is to demonstrate the fallibility of these ideas in a general context. The reality of most small-ticket consumer categories is that consumers are not fully informed about all the alternatives. This is because the majority of information for small-ticket purchases comes from advertising and not all potential consumers are exposed to advertising from every brand. By relaxing the simple assumption that consumers are fully informed, I show that the three ideas cited above are frequently incorrect. Copyright Springer Science + Business Media, Inc. 2005

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    Bibliographic Info

    Article provided by Springer in its journal Quantitative Marketing and Economics.

    Volume (Year): 3 (2005)
    Issue (Month): 1 (January)
    Pages: 41-70

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    Handle: RePEc:kap:qmktec:v:3:y:2005:i:1:p:41-70

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    Web page: http://www.springerlink.com/link.asp?id=111240

    Related research

    Keywords: differentiation; collusion; consumer heterogeneity; pricing strategies;

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    1. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
    2. Nedungadi, Prakash, 1990. " Recall and Consumer Consideration Sets: Influencing Choice without Altering Brand Evaluations," Journal of Consumer Research, University of Chicago Press, vol. 17(3), pages 263-76, December.
    3. Yuxin Chen & Ganesh Iyer & V. Padmanabhan, 2002. "Referral Infomediaries," Marketing Science, INFORMS, vol. 21(4), pages 412-434, May.
    4. David A. Soberman, 2004. "Research Note: Additional Learning and Implications on the Role of Informative Advertising," Management Science, INFORMS, vol. 50(12), pages 1744-1750, December.
    5. Yuxin Chen & Chakravarthi Narasimhan & Z. John Zhang, 2001. "Individual Marketing with Imperfect Targetability," Marketing Science, INFORMS, vol. 20(1), pages 23-41, November.
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    7. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
    8. Grether, David M. & Plott, Charles R., . "The Effects of Market Practices in Oligopolistic Markets: An Experimental Examination of the Ethyl Case," Working Papers 404, California Institute of Technology, Division of the Humanities and Social Sciences.
    9. Osborne, Martin J & Pitchik, Carolyn, 1986. "The Nature of Equilibrium in a Location Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 223-37, February.
    10. Anthony Dukes & Esther Gal–Or, 2003. "Negotiations and Exclusivity Contracts for Advertising," Marketing Science, INFORMS, vol. 22(2), pages 222-245, November.
    11. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
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    13. Stiglitz, Joseph E., 1989. "Imperfect information in the product market," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 13, pages 769-847 Elsevier.
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    Cited by:
    1. Cleeren, Kathleen & Dekimpe, Marnik G. & Gielens, Katrijn & Verboven, Frank, 2008. "Intra- and Inter-Format Competition Among Discounters and Supermarkets," CEPR Discussion Papers 6964, C.E.P.R. Discussion Papers.
    2. Widenhorn, Andreas & Salhofer, Klaus, 2012. "Price sensitivity within and across retail formats," Congress Papers 124108, Italian Association of Agricultural and Applied Economics (AIEAA).

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