Advertising as Distortion of Learning in Markets with Network Externalities
AbstractWe 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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Bibliographic InfoPaper provided by Oslo University, Department of Economics in its series Memorandum with number 24/2006.
Length: 28 pages
Date of creation: 23 Nov 2006
Date of revision:
Contact details of provider:
Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
Web page: http://www.oekonomi.uio.no/indexe.html
More information through EDIRC
Advertising; availability heuristic; herding behavior; information; lock-in;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-12-01 (All new papers)
- NEP-CBE-2006-12-01 (Cognitive & Behavioural Economics)
- NEP-COM-2006-12-01 (Industrial Competition)
- NEP-MIC-2006-12-01 (Microeconomics)
- NEP-MKT-2006-12-01 (Marketing)
- NEP-NET-2006-12-01 (Network Economics)
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