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Comsumption Externalities, Coordination, and Advertising

Author

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  • Ivan Pastine

    (Bilkent University, Turkey, and CEPR)

  • Tuvana Pastine

    (Bilkent University, Turkey, and CEPR)

Abstract

The aim of this article is to demonstrate that advertising can have an important function in markets with consumption externalities apart from its persuasive and informative roles. We show that advertising may function as a device to coordinate consumer expectations of the purchasing decisions of other consumers in markets with consumption externalities. The implications of advertising as a coordinating device are examined in the pricing and advertising decisions of firms interacting strategically. Although, at times, the one-period advertising expense can exceed the one-period monopoly profit, in equilibrium, consumers will pay a premium for the more heavily advertised brand. Copyright Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association

Suggested Citation

  • Ivan Pastine & Tuvana Pastine, 2002. "Comsumption Externalities, Coordination, and Advertising," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(3), pages 919-943, August.
  • Handle: RePEc:ier:iecrev:v:43:y:2002:i:3:p:919-943
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    References listed on IDEAS

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    10. Pastine, Ivan & Pastine, Tuvana, 2005. "Coordination in Markets with Consumption Externalities: The Role of Advertising and Product Quality," CEPR Discussion Papers 5152, C.E.P.R. Discussion Papers.
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    Citations

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    Cited by:

    1. Ulrich Doraszelski & Sarit Markovich, 2007. "Advertising dynamics and competitive advantage," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 557-592, September.
    2. Kretschmer, Tobias & Rösner, Mariana, 2010. "Increasing Dominance - the Role of Advertising, Pricing and Product Design," Discussion Papers in Business Administration 11500, University of Munich, Munich School of Management.
    3. Pepall, Lynne & Reiff, Joseph, 2016. "The “Veblen” effect, targeted advertising and consumer welfare," Economics Letters, Elsevier, vol. 145(C), pages 218-220.
    4. Antoine Mandel & Xavier Venel, 2017. "Dynamic competition over social networks Dynamic competition over social networks," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01524453, HAL.
    5. Friedrichsen, Jana, 2013. "Image concerns and the provision of quality," Discussion Papers, Research Unit: Market Behavior SP II 2013-211, Social Science Research Center Berlin (WZB).
    6. Maria Alipranti & Emmanuel Petrakis, 2013. "Comparative Advertising in Markets with Network Externalities," Working Papers 1306, University of Crete, Department of Economics.
    7. Nick Vikander, 2011. "Targeted Advertising and Social Status," Tinbergen Institute Discussion Papers 11-016/1, Tinbergen Institute.
    8. Henk Folmer & Auke Leen, 2013. "Why do successful restaurants not raise their prices?," Letters in Spatial and Resource Sciences, Springer, vol. 6(2), pages 81-90, July.
    9. Tuvana Pastine & Ivan Pastine, 2001. "Consumption externalities, coordination and advertising," Open Access publications 10197/693, School of Economics, University College Dublin.
    10. Jana Friedrichsen & Dirk Engelmann, 2013. "Who Cares for Social Image? Interactions between Intrinsic Motivation and Social Image Concerns," CESifo Working Paper Series 4514, CESifo Group Munich.
    11. Chen, Jihui & Waters, George, 2017. "Firm efficiency, advertising and profitability: Theory and evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 240-248.
    12. C. Robert Clark & Ignatius J. Horstmann, 2005. "Advertising and Coordination in Markets with Consumption Scale Effects," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(2), pages 377-401, June.
    13. Pastine, Ivan & Pastine, Tuvana, 2012. "Incumbency advantage and political campaign spending limits," Journal of Public Economics, Elsevier, vol. 96(1), pages 20-32.
    14. Brekke, Kjell Arne & Rege, Mari, 2006. "Advertising as Distortion of Learning in Markets with Network Externalities," Memorandum 24/2006, Oslo University, Department of Economics.
    15. Antoine Mandel & Xavier Venel, 2017. "Dynamic competition over social networks," Documents de travail du Centre d'Economie de la Sorbonne 17021, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    16. Pastine, Ivan & Pastine, Tuvana, 2005. "Coordination in Markets with Consumption Externalities: The Role of Advertising and Product Quality," CEPR Discussion Papers 5152, C.E.P.R. Discussion Papers.
    17. Ivan Pastine & Tuvana Pastine, 2005. "Coordination in markets with consumption externalities : the role of advertising and product quality," Open Access publications 10197/687, School of Economics, University College Dublin.
    18. Foucart, Renaud & Friedrichsen, Jana, 2016. "Bidding for network size," MPRA Paper 72136, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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