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Vertical Product Differentiation and Advertising

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  • Caroline Elliott

Abstract

A duopoly model is developed in which firms' strategic variables include brand quality, the number of distinct market segments to enter and price. Informative advertising is used to overcome consumer ignorance about brands. In contrast to many existing models in which firms engage in price competition, the subgame perfect equilibria of the game are not characterised by the production of vertically differentiated products. Further, whilst the firms typically produce identical high quality products, in some circumstances the production of homogeneous low quality brands can be an equilibrium strategy.

Suggested Citation

  • Caroline Elliott, 2004. "Vertical Product Differentiation and Advertising," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 11(1), pages 37-53.
    • Handle: RePEc:taf:ijecbs:v:11:y:2004:i:1:p:37-53
    DOI: 10.1080/1357151032000172228
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    References listed on IDEAS

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    1. Bester, Helmut & Petrakis, Emmanuel, 1996. "Coupons and oligopolistic price discrimination," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 227-242.
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    7. Garella, Paolo G. & Lambertini, Luca, 1999. "Good vs. bad characteristics in vertical differentiation," Economics Letters, Elsevier, vol. 65(2), pages 245-248, November.
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    Cited by:

    1. Stoneman, Paul, 2011. "Soft Innovation: Economics, Product Aesthetics, and the Creative Industries," OUP Catalogue, Oxford University Press, number 9780199697021, Decembrie.
    2. Rim Lahmandi-Ayed & Didier Laussel, 2024. "Random Informative Advertising with Vertically Differentiated Products," Games, MDPI, vol. 15(2), pages 1-29, March.
    3. Ji Sun & Qiang Gong & Leonard F. S. Wang, 2022. "Revenge consumption, government‐led voucher, and social welfare," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 2570-2577, September.

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    More about this item

    Keywords

    Product Differentiation; Advertising; Duopoly; JEL Classifications: C7; D8; L1;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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