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Coordination in Markets with Consumption Externalities : The Role of Advertising and Product Quality

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  • Ivan Pastine

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  • Tuvana Pastine

    ()

Abstract

This paper studies advertising in vertically differentiated product markets with positive consumption externalities. In markets with consumption externalities, the value of the product to the consumer depends on the purchasing decisions of other consumers. In such markets, we show that firms will engage in advertising competition in order to convince consumers of their popularity only as long as they produce goods of similar quality. The firm with the lower quality product will have a greater incentive to advertise. If it is not the brand to provide the greater consumption externality it will have very low market share due to its low intrinsic quality. Hence, in equilibrium, the lower quality product will often be more popular. This provides an additional explanation for the empirical observation that in some markets high quality is associated with lower levels of advertising.

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Bibliographic Info

Paper provided by Bilkent University, Department of Economics in its series Departmental Working Papers with number 0003.

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Date of creation: 2000
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Handle: RePEc:bil:bilpap:0003

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  1. 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.
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  12. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October.
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  14. Ignatius Horstmann & Sridhar Moorthy, 2003. "Advertising Spending and Quality for Services: The Role of Capacity," Quantitative Marketing and Economics, Springer, vol. 1(3), pages 337-365, September.
  15. Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-23, March.
  16. Ivan Pastine & Tuvana Pastine, 2000. "Consumption Externalities, Coordination and Advertising," Departmental Working Papers 0002, Bilkent University, Department of Economics.
  17. Moorthy, S. & Zhao, H., 1995. "Advertising and Quality: An Empirical Analysis," Papers 95-04, Rochester, Business - Marketing Science.
  18. 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.
  19. 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.
  20. Porter, Michael E, 1976. "Interbrand Choice, Media Mix and Market Performance," American Economic Review, American Economic Association, vol. 66(2), pages 398-406, May.
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Cited by:
  1. Ivan Pastine & Tuvana Pastine, 2000. "Consumption Externalities, Coordination and Advertising," Departmental Working Papers 0002, Bilkent University, Department of Economics.

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