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Misinformative advertising

  • Ruiz-Aliseda, Francisco

    ()

    (IESE Business School)

This paper analyzes how advertising can be used to mislead rivals in an oligopoly environment with demand uncertainty. In particular, we examine a two-period game in which two firms each sell a differentiated product whose attractiveness vis-à-vis the competitor's product is unknown. In each period, a firm sets prices for its product and exerts an advertising effort that is imperfectly observed by the rival later on. Advertising is persuasive in that it enhances willingness to pay, but it can also be used to manipulate rivals' beliefs about initially unobservable differences in consumers' quality perceptions. In equilibrium, each firm uses advertising to persuade consumers and to interfere with the rival's learning about this unknown dimension of demand. This can be done because the effect of imperfectly observed advertising cannot be separated out of the effect of the unknown quality differential, which creates a signal extraction problem for the competitor. There always exists acontinuum of (symmetric) equilibria, but refining the equilibrium set selects out a unique one in which firms price in the first-period as in the static equilibrium, whereas the misinformative usage of advertising makes firms under advertise if and only if the marginal cost of advertising is high enough.

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Paper provided by IESE Business School in its series IESE Research Papers with number D/809.

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Length: 32 pages
Date of creation: 15 Jul 2009
Date of revision:
Handle: RePEc:ebg:iesewp:d-0809
Contact details of provider: Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/

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  1. Michael H. Riordan, 1985. "Imperfect Information and Dynamic Conjectural Variations," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 41-50, Spring.
  2. Horstmann, Ignatius & MacDonald, Glenn, 2003. "Is advertising a signal of product quality? Evidence from the compact disc player market, 1983-1992," International Journal of Industrial Organization, Elsevier, vol. 21(3), pages 317-345, March.
  3. Godfrey Keller & Sven Rady, 1998. "Optimal Experimentation in a Changing Environment," Game Theory and Information 9801001, EconWPA.
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  5. Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, Elsevier.
  6. Ramon Caminal & Xavier Vives, 1996. "Why Market Shares Matter: An Information-Based Theory," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 221-239, Summer.
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  8. Keller, Godfrey & Rady, Sven, 2003. " Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 138-65, Spring.
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  10. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
  11. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
  12. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-65, November.
  13. James D. Dana, 2000. "Competition in Price and Availability when Availability is Unobservable," Econometric Society World Congress 2000 Contributed Papers 1450, Econometric Society.
  14. Avinash Dixit & Victor Norman, 1978. "Advertising and Welfare," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 1-17, Spring.
  15. Joseph B. Mazzola & Kevin F. McCardle, 1996. "A Bayesian Approach to Managing Learning-Curve Uncertainty," Management Science, INFORMS, vol. 42(5), pages 680-692, May.
  16. Drew Fudenberg & Jean Tirole, 1986. "A "Signal-Jamming" Theory of Predation," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 366-376, Autumn.
  17. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October.
  18. Mark N. Hertzendorf, 1993. "I'm Not a High-Quality Firm -- But I Play One on TV," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 236-247, Summer.
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