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Informative Advertising with Differentiated Products

Informative Advertising with Differentiated Products Abstract In this paper we study the role of promotional expenditures by sellers in a model of product differentiation. Advertising conveys full and accurate information about the characteristics of products. Heterogeneous consumers, who have no source of information other than advertisements, seek to purchase the products that best fit their needs. Despite the roles played by advertising in improving the matching of products and consumers, and in increasing the elasticity of demand faced by each firm, we find that the market-determined Jevels of advertising are excessive, given the extent of diversity in the market. We derive a promotional equilibrium based on a specific information transmission technology, paying explicit attention to the structure of consumer information and its impact on firms' demand curves. This allows us to study the effects of changes in the advertising technology, including an increased ability to target messages to specific groups of consumers, on the equilibrium in the product market. We find that decreased advertising costs may reduce profits by increasing the severity of price competition. This content is only available as a PDF. © 1984 The Society for Economic Analysis Limited http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Economic Studies Oxford University Press

Informative Advertising with Differentiated Products

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References (11)

Publisher
Oxford University Press
Copyright
© 1984 The Society for Economic Analysis Limited
ISSN
0034-6527
eISSN
1467-937X
DOI
10.2307/2297705
Publisher site
See Article on Publisher Site

Abstract

Abstract In this paper we study the role of promotional expenditures by sellers in a model of product differentiation. Advertising conveys full and accurate information about the characteristics of products. Heterogeneous consumers, who have no source of information other than advertisements, seek to purchase the products that best fit their needs. Despite the roles played by advertising in improving the matching of products and consumers, and in increasing the elasticity of demand faced by each firm, we find that the market-determined Jevels of advertising are excessive, given the extent of diversity in the market. We derive a promotional equilibrium based on a specific information transmission technology, paying explicit attention to the structure of consumer information and its impact on firms' demand curves. This allows us to study the effects of changes in the advertising technology, including an increased ability to target messages to specific groups of consumers, on the equilibrium in the product market. We find that decreased advertising costs may reduce profits by increasing the severity of price competition. This content is only available as a PDF. © 1984 The Society for Economic Analysis Limited

Journal

The Review of Economic StudiesOxford University Press

Published: Jan 1, 1984

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