The Role of Informative Advertising in Aligning Preferences Over Product Design

Roig Guillem ()
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Roig Guillem: Faculty of Economics, 25807 Universidad Del Rosario , Bogotá, Colombia

The B.E. Journal of Theoretical Economics, 2024, vol. 24, issue 2, 741-758

Abstract: This article explores the relationship between product design and advertising, traditionally viewed as distinct business decisions. I build upon the seminal work of Matutes and Regibeau (1988. “Mix and Match: Product Compatibility Without Network Externalities.” The RAND Journal of Economics 19 (2): 221–34), where firms produce components that combine to form product systems, and introduce the necessity for firms to advertise their products to create consumer awareness. I find that a firm’s incentive to advertise increases with product compatibility. Greater product compatibility reduces competition, encouraging firms to broaden their market presence through advertising. Contrary to Matutes and Regibeau, when advertising influences product awareness, consumers prefer products with moderate compatibility over those that are entirely incompatible. Consequently, advertising aligns the compatibility preferences of both firms and consumers.

Keywords: product compatibility; informative advertising; preference alignment (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 L15 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/bejte-2023-0096

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