Misinformative Advertising

32 Pages Posted: 28 Jul 2009

Date Written: July 1, 2009

Abstract

This paper analyzes how advertising can be used to mislead rivals in an oligopoly environment with demand uncertainty. In particular, we examine a two-period game in whichtwo firms each sell a differentiated product whose attractiveness vis-à-vis the competitor's product is unknown. In each period, a firm sets prices for its product and exerts an advertising effort that is imperfectly observed by the rival later on. Advertising is persuasive in that it enhances willingness to pay, but it can also be used to manipulate rivals' beliefs about initially unobservable differences in consumers' quality perceptions. In equilibrium, each firm uses advertising to persuade consumers and to interfere with the rival's learning about this unknown dimension of demand. This can be done because the effect of imperfectly observed advertising cannot be separated out of the effect of the unknown quality differential, which creates a signal extraction problem for the competitor. There always exists a continuum of (symmetric) equilibria, but refining the equilibrium set selects out a unique one in which firms price in the first-period as in the static equilibrium, whereas the misinformative usage of advertising makes firms underadvertise if and only if the marginal cost of advertising is high enough.

Keywords: signal-jamming, imperfect observability, persuasive advertising, perfect Bayesian, equilibrium, strategic complementary

JEL Classification: L13, M21

Suggested Citation

Ruiz-Aliseda, Francisco, Misinformative Advertising (July 1, 2009). IESE Business School Working Paper No. 809. Available at SSRN: https://ssrn.com/abstract=1440156 or http://dx.doi.org/10.2139/ssrn.1440156

Francisco Ruiz-Aliseda (Contact Author)

Pontifical Catholic University of Chile ( email )

Vicuna Mackenna 4860
Santiago, 99999
Chile

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