Coordination in Markets with Consumption Externalities: The Role of Advertising and Product Quality
Ivan Pastine and
No 5152, CEPR Discussion Papers from C.E.P.R. Discussion Papers
This paper studies advertising in vertically differentiated product markets with positive consumption externalities. In markets with consumption externalities, the value of the product to the consumer depends on the purchasing decisions of other consumers. In such markets, we show that firms will engage in advertising competition in order to convince consumers of their popularity only as long as they produce goods of similar quality. The firm with the lower quality product will have a greater incentive to advertise. If it is not the brand to provide the greater consumption externality it will have very low market share due to its low intrinsic quality. Hence, in equilibrium, the lower quality product will often be more popular. This provides an additional explanation for the empirical observation that in some markets high quality is associated with lower levels of advertising.
Keywords: advertising; consumption externalities; coordination; product quality (search for similar items in EconPapers)
JEL-codes: L13 L15 M37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-mic, nep-mkt and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at firstname.lastname@example.org
Working Paper: Coordination in markets with consumption externalities: the role of advertising and product quality (2005)
Working Paper: Coordination in Markets with Consumption Externalities: The Role of Advertising and Product Quality (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:5152
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=5152
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().