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Advertising as Distortion of Learning in Markets with Network Externalities

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Author Info
Brekke, Kjell Arne () (The Ragnar Frisch Centre for Economic Research)
Rege, Mari () (University of Stavanger)
Abstract

We present a theory of how advertising can break a lock-in by distorting beliefs about market shares in markets with network externalities. On the background of the availability heuristic we assume that people learn about market shares by observing product adoption of others, but are not able to fully distinguish between observations of real people and …ctitious characters in advertisements. We look at a game between an incumbent and an entrant producing close substitutes. Our analysis shows that if the entrant’s product is of su¢ ciently high quality, then the entrant will use advertising in order to break the lock-in and the incumbent will not advertise at all. However, if the quality di¤erential between the two products is small, then the incumbent may advertise and make it unpro…table for the entrant to break the lock-in.

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Publisher Info
Paper provided by Oslo University, Department of Economics in its series Memorandum with number 24/2006.

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Length: 28 pages
Date of creation: 23 Nov 2006
Date of revision:
Handle: RePEc:hhs:osloec:2006_024

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Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
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Related research
Keywords: Advertising availability heuristic herding behavior information lock-in

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising

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  2. repec:att:wimass:199325 is not listed on IDEAS
  3. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 505-540, May. [Downloadable!] (restricted)
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  4. Salop, Steven C, 1979. "Strategic Entry Deterrence," American Economic Review, American Economic Association, vol. 69(2), pages 335-38, May. [Downloadable!] (restricted)
  5. Needham, Douglas, 1976. "Entry Barriers and Non-Price Aspects of Firms' Behavior," Journal of Industrial Economics, Blackwell Publishing, vol. 25(1), pages 29-43, September. [Downloadable!] (restricted)
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  7. Ivan Pastine & Tuvana Pastine, 2000. "Consumption Externalities, Coordination and Advertising," Departmental Working Papers 0002, Bilkent University, Department of Economics.
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  8. Bagwell, Kyle & Ramey, Garey, 1990. "Advertising and pricing to deter or accommodate entry when demand is unknown," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 93-113. [Downloadable!] (restricted)
  9. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June. [Downloadable!] (restricted)
  10. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Blackwell Publishing, vol. 40(1), pages 55-83, March. [Downloadable!] (restricted)
  11. Schmalensee, Richard, 1983. "Advertising and Entry Deterrence: An Exploratory Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 636-53, August. [Downloadable!] (restricted)
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