Coordination in markets with consumption externalities : the role of advertising and product quality

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Title: Coordination in markets with consumption externalities : the role of advertising and product quality
Authors: Pastine, Ivan
Pastine, Tuvana
Permanent link: http://hdl.handle.net/10197/687
Date: Jul-2005
Abstract: 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.
Type of material: Working Paper
Publisher: Centre for Economic Policy Research
Copyright (published version): Copyright: Ivan Pastine and Tuvana Pastine
Keywords: Advertising;Consumption externalities;Coordination;Product quality
Subject LCSH: Product differentiation
Advertising
Quality of products
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Research Collection

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