Comparative Advertising: The role of prices

Stuart Baumann

MPRA Paper from University Library of Munich, Germany

Abstract: In markets where firms sell similar goods to their competitors, firms may be able to free-ride off the costly price signalling of competitor firms by engaging in price comparative advertising. As the goods are similar, consumers can reason that if one good is high quality (revealed through price signalling) then so is the other. This paper models this phenomenon and finds that in equilibrium there will be firms price signalling as well as freeriding firms that signal through price comparative advertising. Welfare is strictly higher in markets where advertising firms are active relative to pure price signalling markets. In some cases advertising markets can be even more efficient than full information markets as advertisers surrender market power to avoid costly price signalling.

Keywords: Comparative advertising; Price Signalling (search for similar items in EconPapers)
JEL-codes: D82 D83 M37 (search for similar items in EconPapers)
Date: 2017-06-25
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:79872

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