Informative Advertising with Differentiated Products

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ID: 305489
1984
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Abstract
In this paper we study the role of promotional expenditures by sellers in a model of product differentiation. Advertising conveys full and accurate information about the characteristics of products. Heterogeneous consumers, who have no source of information other than advertisements, seek to purchase the products that best fit their needs. Despite the roles played by advertising in improving the matching of products and consumers, and in increasing the elasticity of demand faced by each firm, we find that the market-determined Jevels of advertising are excessive, given the extent of diversity in the market. We derive a promotional equilibrium based on a specific information transmission technology, paying explicit attention to the structure of consumer information and its impact on firms' demand curves. This allows us to study the effects of changes in the advertising technology, including an increased ability to target messages to specific groups of consumers, on the equilibrium in the product market. We find that decreased advertising costs may reduce profits by increasing the severity of price competition.
Reference Key
openalex_W2149701684 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Gene M. Grossman, Carl Shapiro
Journal The Review of Economic Studies
Year 1984
DOI
10.2307/2297705
URL
https://doi.org/10.2307/2297705
Keywords Keywords not found

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