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Coordination In Markets With Consumption Externalities: Advertising And Product Quality

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  • IVAN PASTINE
  • TUVANA PASTINE

Abstract

In this paper we study advertising in markets with positive consumption externalities. In such markets, we show that firms may engage in advertising competition to coordinate consumer expectations on their own brand as long as they produce goods of similar quality. The firm with the lower-quality product has a greater incentive to advertise. Hence in equilibrium, the lower‐quality product will often be more popular.

Suggested Citation

  • Ivan Pastine & Tuvana Pastine, 2011. "Coordination In Markets With Consumption Externalities: Advertising And Product Quality," Manchester School, University of Manchester, vol. 79(1), pages 45-62, January.
  • Handle: RePEc:bla:manchs:v:79:y:2011:i:1:p:45-62
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    File URL: http://hdl.handle.net/10.1111/j.1467-9957.2010.02186.x
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    References listed on IDEAS

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    14. Ippolito, Pauline M, 1990. "Bonding and Nonbonding Signals of Product Quality," The Journal of Business, University of Chicago Press, vol. 63(1), pages 41-60, January.
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    Cited by:

    1. Maria Alipranti & Emmanuel Petrakis, 2013. "Comparative Advertising in Markets with Network Externalities," Working Papers 1306, University of Crete, Department of Economics.

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