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The Role of Informative Advertising in Aligning Preferences Over Product Design

Author

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  • Roig Guillem

    (Faculty of Economics, 25807 Universidad Del Rosario , Bogotá, Colombia)

Abstract

This article explores the relationship between product design and advertising, traditionally viewed as distinct business decisions. I build upon the seminal work of Matutes and Regibeau (1988. “Mix and Match: Product Compatibility Without Network Externalities.” The RAND Journal of Economics 19 (2): 221–34), where firms produce components that combine to form product systems, and introduce the necessity for firms to advertise their products to create consumer awareness. I find that a firm’s incentive to advertise increases with product compatibility. Greater product compatibility reduces competition, encouraging firms to broaden their market presence through advertising. Contrary to Matutes and Regibeau, when advertising influences product awareness, consumers prefer products with moderate compatibility over those that are entirely incompatible. Consequently, advertising aligns the compatibility preferences of both firms and consumers.

Suggested Citation

  • Roig Guillem, 2024. "The Role of Informative Advertising in Aligning Preferences Over Product Design," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 24(2), pages 741-758.
    • Handle: RePEc:bpj:bejtec:v:24:y:2024:i:2:p:741-758:n:1004
    DOI: 10.1515/bejte-2023-0096
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    More about this item

    Keywords

    product compatibility; informative advertising; preference alignment;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • 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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