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Advertising and Coordination in Markets with Consumption Scale Effects

Author

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  • C. Robert Clark
  • Ignatius J. Horstmann

Abstract

Many heavily advertised consumer products are both well established and have no obvious quality variation. A signaling explanation for advertising in these product categories is therefore not compelling. In this paper we develop a model of firm advertising based on the notion that consumer valuations of different products may depend on the number of individuals purchasing each. We show that firms can use advertising to coordinate consumer purchases in such cases, even if advertising levels are unobservable. Failure to see an ad for a product leads consumers to believe that the product is likely low value and firms advertise to avoid these negative beliefs. We show that the model can generate predictions on advertising, market share and profitability that are consistent with observed behavior. The model also generates the stable prices and market share time series behavior observed for advertised consumer products and that existing coordination models fail to provide. Il existe plusieurs produits à la fois bien établis et à qualité comparable, qui font l'objet de campagnes publicitaires coûteuses. Toutefois, l'explication usuelle avancée pour justifier la publicité coûteuse pour ces produits, c'est-à-dire le fait qu'elle permette aux firmes de faire connaître la qualité de leurs produits, ne correspond aucunement à cette situation. Dans ce papier, nous développons un modèle de publicité basé sur l'idée suivante : l'utilité qu'un consommateur retire d'un produit peut dépendre aussi du nombre de consommateurs qui achètent également le même produit. Nous montrons dans ce cas que les firmes peuvent utiliser des messages publicitaires pour inciter les consommateurs à consommer le même produit et ce, même si les dépenses publicitaires ne sont pas observables. Dans notre modèle, un consommateur qui n'observe pas de message publicitaire pour un produit quelconque croira que ce même produit a probablement peu de valeur; par conséquent, à l'équilibre, les firmes se serviront de messages publicitaires pour éviter ces croyances négatives de la part des consommateurs. Par ailleurs, notre modèle génère des prédictions sur les activités de publicité, les parts de marché et les profits qui sont cohérents avec le comportement observé. Notre modèle, contrairement aux modèles de coordination existants dans la littérature, prédit également des prix stables et des séries chronologiques de parts de marché qui correspondent aux observations disponibles sur les produits qui font l'objet de compagnes publicitaires.

Suggested Citation

  • C. Robert Clark & Ignatius J. Horstmann, 2004. "Advertising and Coordination in Markets with Consumption Scale Effects," CIRANO Working Papers 2004s-35, CIRANO.
  • Handle: RePEc:cir:cirwor:2004s-35
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    References listed on IDEAS

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    1. Bagwell, Kyle & Ramey, Garey, 1994. "Coordination Economies, Advertising, and Search Behavior in Retail Markets," American Economic Review, American Economic Association, vol. 84(3), pages 498-517, June.
    2. 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.
    3. Maurice W. Sasieni, 1989. "Optimal Advertising Strategies," Marketing Science, INFORMS, vol. 8(4), pages 358-370.
    4. Horstmann, Ignatius J & MacDonald, Glenn M, 1994. "When Is Advertising a Signal of Product Quality?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(3), pages 561-584, Fall.
    5. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    6. Pradeep K. Chintagunta & Naufel J. Vilcassim, 1992. "An Empirical Investigation of Advertising Strategies in a Dynamic Duopoly," Management Science, INFORMS, vol. 38(9), pages 1230-1244, September.
    7. Pradeep K. Chintagunta, 1993. "Investigating the Sensitivity of Equilibrium Profits to Advertising Dynamics and Competitive Effects," Management Science, INFORMS, vol. 39(9), pages 1146-1162, September.
    8. Bental, Benjamin & Spiegel, Menahem, 1995. "Network Competition, Product Quality, and Market Coverage in the Presence of Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 197-208, June.
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    Cited by:

    1. Sahuguet, Nicolas, 2011. "A model of repeat advertising," Economics Letters, Elsevier, vol. 111(1), pages 20-22, April.
    2. Pepall, Lynne & Reiff, Joseph, 2016. "The “Veblen” effect, targeted advertising and consumer welfare," Economics Letters, Elsevier, vol. 145(C), pages 218-220.
    3. 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.
    4. 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.
    5. 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.
    6. 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.

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    Keywords

    advertising; coordination; beliefs; publicité; coordination; croyances;

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