COORDINATION IN MARKETS WITH CONSUMPTION EXTERNALITIES: ADVERTISING AND PRODUCT QUALITY

Ivan Pastine and Tuvana Pastine

Manchester School, 2011, vol. 79, issue 1, 45-62

Abstract: In this paper we study advertising in markets with positive consumption externalities. In such markets, we show that firms may engage in advertising competition to coordinate consumer expectations on their own brand as long as they produce goods of similar quality. The firm with the lower-quality product has a greater incentive to advertise. Hence in equilibrium, the lower‐quality product will often be more popular.

Date: 2011
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