ADVERTISING, BRAND LOYALTY AND PRICING

Ioana Chioveanu

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: I construct a model in which an oligopoly first invests in persuasive advertising in order to induce brand loyalty to consumers who would otherwise buy the cheapest alternative on the market, and then competes in prices. Despite ex-ante symmetry, at equilibrium, there is one firm which chooses a lower advertising level, while the remaining ones choose the same higher advertising. For the endogenous profile of advertising expenditure, there are a family of pricing equilibria with at least two firms randomizing on prices. The setting offers a way of modelling homogenous product markets where persuasive advertising creates subjective product differentiation and changes the nature of subsequent price competition. The pricing stage of the model can be regarded as a variant of the Model of Sales by Varian (1980) and the two stage game as a way to endogenize consumers heterogeneity raising a robustness question to Varian¿s symmetric setting.

Keywords: oligopoly; advertising; price dispersion; brand loyalty (search for similar items in EconPapers)
JEL-codes: D21 D43 L11 L13 M37 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2005-11
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published by Ivie

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http://www.ivie.es/downloads/docs/wpasad/wpasad-2005-32.pdf Fisrt version / Primera version, 2005 (application/pdf)

Related works:
Journal Article: Advertising, brand loyalty and pricing (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasad:2005-32

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