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Informative Advertising and Product Differentiation

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Author Info
Christou, Charalambos
Vettas, Nikolaos
Abstract

We study informative advertising within a random-utility, non-localized competition model of product differentiation. In a symmetric equilibrium, advertisement is sub-optimal when product differentiation is small, and excessive otherwise. Increasing the number of firms may increase or decrease the market price. We emphasise that quasi-concavity of profits may fail, as firms may prefer a high price deviation, targeting consumers that only become informed about their product (a feature that, while present in earlier models of informative advertising, has not received enough attention). As product differentiation becomes small, a symmetric equilibrium does not exist.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3953.

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Date of creation: Jun 2003
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Handle: RePEc:cpr:ceprdp:3953

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Related research
Keywords: informative advertising; non-localized competition; product differentiation; random utility;

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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  1. Bloch, Francis & Manceau, Delphine, 1999. "Persuasive advertising in Hotelling's model of product differentiation," International Journal of Industrial Organization, Elsevier, vol. 17(4), pages 557-574, May. [Downloadable!] (restricted)
  2. Simon P. Anderson & Régis Renault, 2002. "Advertising Content," Virginia Economics Online Papers 362, University of Virginia, Department of Economics. [Downloadable!]
    Other versions:
  3. Baye, M.R. & Kovenock, D., 1992. "How to Sell a Pickup Truck; "Beat-or-Pay" Advertisements as Facilitating Devices"," Purdue University Economics Working Papers 1032, Purdue University, Department of Economics.
    Other versions:
  4. Kyle Bagwell, 2005. "The Economic Analysis of Advertising," Discussion Papers 0506-01, Columbia University, Department of Economics. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!] (restricted)
  6. Bester, Helmut & Petrakis, Emmanuel, 1995. "Price competition and advertising in oligopoly," European Economic Review, Elsevier, vol. 39(6), pages 1075-1088, June. [Downloadable!] (restricted)
  7. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring. [Downloadable!] (restricted)
  8. Wolinsky, Asher, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 493-511, August. [Downloadable!] (restricted)
  9. 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)
  10. Bagwell, Kyle & Ramey, Garey, 1994. "Coordination Economies, Advertising, and Search Behavior in Retail Markets," American Economic Review, American Economic Association, vol. 84(3), pages 498-517, June. [Downloadable!] (restricted)
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  11. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January. [Downloadable!] (restricted)
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  12. Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-23, March. [Downloadable!] (restricted)
  13. Meurer, Michael & Stahl, Dale II, 1994. "Informative advertising and product match," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 1-19, March. [Downloadable!] (restricted)
  14. Perloff, Jeffrey M & Salop, Steven C, 1985. "Equilibrium with Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 52(1), pages 107-20, January. [Downloadable!] (restricted)
  15. Deneckere, Raymond J & Rothschild, Michael, 1992. "Monopolistic Competition and Preference Diversity," Review of Economic Studies, Blackwell Publishing, vol. 59(2), pages 361-73, April. [Downloadable!] (restricted)
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  16. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October. [Downloadable!] (restricted)
  17. Hideo Konishi, 1999. "Concentration of Competing Retail Stores," Boston College Working Papers in Economics 447, Boston College Department of Economics. [Downloadable!]
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  18. 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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