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Increasing Dominance - the Role of Advertising, Pricing and Product Design

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  • Kretschmer, Tobias
  • Rösner, Mariana

Abstract

Despite the empirical relevance of advertising strategies in concentrated markets, the economics literature is largely silent on the effect of persuasive advertising strategies on pricing, market structure and increasing (or decreasing) dominance. In a simple model of persuasive advertising and pricing with differentiated goods, we analyze the interdependencies between ex-ante asymmetries in consumer appeal, advertising and prices. Products with larger initial appeal to consumers will be advertised more heavily but priced at a higher level - that is, advertising and price discounts are strategic substitutes for products with asymmetric initial appeal. We find that the escalating effect of advertising dominates the moderating effect of pricing so that post-competition market shares are more asymmetric than pre-competition differences in consumer appeal. We further find that collusive advertising (but competitive pricing) generates the same market outcomes, and that network effects lead to even more extreme market outcomes, both directly and via the effect on advertising.

Suggested Citation

  • 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.
  • Handle: RePEc:lmu:msmdpa:11500
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    File URL: https://epub.ub.uni-muenchen.de/11500/1/KretschmerRoesnerMay2010.pdf
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    References listed on IDEAS

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    Cited by:

    1. Maria Alipranti & Emmanuel Petrakis, 2013. "Comparative Advertising in Markets with Network Externalities," Working Papers 1306, University of Crete, Department of Economics.

    More about this item

    Keywords

    Increasing dominance; persuasive advertising; duopoly; network effects;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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