Informative Advertisement of Partial Compatible Products

Guillem Roig

No 14-483, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: Product design and advertisement strategy have been theoretically studied as separate firms decisions. In the present paper, we look at the link between advertisement and product design and we analyze how firms' advertising decisions influence the market effect of product design. We consider a model of informative advertisement where two firms produce a bundle of complementary products which are partially compatible. A product design with more compatible components is associated with a larger intensity of advertisement. Higher compatibility reduces competition between firms, which incentivizes them to give factual information about their bundle. Like Matutes and Regibeau (1988), industry profit and total welfare is maximized with full product compatibility. However, contrary to them, we obtain that consumer surplus is not monotone with the level of product compatibility and its maximum is attained with partial compatibility. Moreover, because consumer surplus not only depends on the equilibrium prices but also on the intensity of advertisement, we find that for intermediate equilibrium levels of advertising, consumers prefer fully compatible components rather than full incompatibility. As a result, a more compatible product design benefits all the agents in the economy.

Keywords: Informative advertisement; product design; partial compatibility; welfare (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 L15 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind, nep-mic, nep-mkt and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:28044

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