Random Informative Advertising with Vertically Differentiated Products

Rim Lahmandi-Ayed () and Didier Laussel ()
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Rim Lahmandi-Ayed: CUT - Centre for Unframed Thinking - ESC [Rennes] - ESC Rennes School of Business
Didier Laussel: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, EHESS - École des hautes études en sciences sociales

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Abstract: div>We study a simple model in which two vertically differentiated firms compete in prices and mass advertising on an initially uninformed market. Consumers differ in their preference for quality.There is an upper bound on prices since consumers cannot spend more on the good than a fixed amount (say, their income). Depending on this income and on the ratio between the advertising cost and quality differential (relative advertising cost), either there is no equilibrium in pure strategies or there exists one of the following three types: (1) an interior equilibrium, where both firms have positive natural markets and charge prices lower than the consumer's income; (2) a constrained interior equilibrium, where both firms have positive natural markets, and the high-quality firm charges the consumer's income or (3) a corner equilibrium, where the low-quality firm has no natural market selling only to uninformed customers. We show that no corner equilibrium exists in which the high-quality firm would have a null natural market. At an equilibrium (whenever there exists one), the high-quality firm always advertises more, charges a higher price and makes a higher profit than the low-quality one. As the relative advertising cost goes to infinity, prices become equal and the advertising intensities converge to zero as well as the profits. Finally, the advertising intensities are, at least globally, increasing with the quality differential. Finally, in all cases, as the advertising parameter cost increases unboundedly, both prices converge increasingly towards the consumer's income.

Keywords: random advertising; advertising cost; vertical differentiation (search for similar items in EconPapers)
Date: 2024-03-22
New Economics Papers: this item is included in nep-com, nep-gth and nep-mic
Note: View the original document on HAL open archive server: https://hal.science/hal-04678637
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Published in Games, 2024, 15, ⟨10.3390/g15020010⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04678637

DOI: 10.3390/g15020010

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