Increasing Dominance - The Role of Advertising, Pricing and Product Design

Working Paper

31 Pages Posted: 1 Feb 2010 Last revised: 5 Aug 2010

See all articles by Tobias Kretschmer

Tobias Kretschmer

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management); Centre for Economic Policy Research (CEPR)

Mariana (Roesner) Stamm

Ludwig Maximilian University of Munich (LMU) - Institute for Communication Economics

Date Written: August 1, 2010

Abstract

Despite the empirical relevance of advertising strategies in concentrated markets, the economics literature is largely silent on the effect of persuasive advertising strategies on pricing and market structure and increasing (or decreasing) dominance. We propose a simple model of persuasive advertising and pricing with differentiated goods and analyze the interdependencies between ex-ante asymmetries in consumer appeal, advertising and prices. We find that products with larger initial appeal to consumers will be advertised more heavily but priced at a higher level - that is, advertising and price discounts are strategic substitutes for products with asymmetric initial appeal. We find that the escalating effect of advertising dominates the moderating effect of pricing so that post-competition market shares are more asymmetric than pre-competition differences in consumer appeal. We further find that collusive advertising (but competitive pricing) generates the same market outcomes, and that network effects lead to even more extreme market outcomes, both directly and via the effect on advertising.

Keywords: Increasing dominance, persuasive advertising, duopoly, network effects

JEL Classification: D21, L11, L13, M37

Suggested Citation

Kretschmer, Tobias and Stamm, Mariana (Roesner), Increasing Dominance - The Role of Advertising, Pricing and Product Design (August 1, 2010). Working Paper, Available at SSRN: https://ssrn.com/abstract=1545754 or http://dx.doi.org/10.2139/ssrn.1545754

Tobias Kretschmer

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Mariana (Roesner) Stamm (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Institute for Communication Economics ( email )

Schackstr. 4
Muenchen, 80539
Germany

HOME PAGE: http://www.en.ice.bwl.uni-muenchen.de/index.html

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