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Questioning Conventional Wisdom About Competition in Differentiated Markets

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Author Info
David Soberman ()
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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File URL: http://hdl.handle.net/10.1007/s11129-005-0299-1
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Publisher 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

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

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. 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. [Downloadable!] (restricted)
  2. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April. [Downloadable!] (restricted)
  3. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 63-81, January. [Downloadable!] (restricted)
  4. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
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  5. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," Journal of Business, University of Chicago Press, vol. 61(4), pages 427-49, October. [Downloadable!] (restricted)
  6. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June. [Downloadable!] (restricted)
  7. Nedungadi, Prakash, 1990. " Recall and Consumer Consideration Sets: Influencing Choice without Altering Brand Evaluations," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 17(3), pages 263-76, December.
  8. 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. [Downloadable!] (restricted)
  9. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 465-91, October. [Downloadable!] (restricted)
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(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. 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. [Downloadable!] (restricted)
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