Pricing and Persuasive Advertising in a Differentiated Market

17 Pages Posted: 11 Apr 2015

See all articles by Baojun Jiang

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School

Kannan Srinivasan

Carnegie Mellon University - David A. Tepper School of Business

Date Written: April 6, 2015

Abstract

This paper examines the effects of consumer preferences, firms’ costs and advertising efficiencies on firms’ pricing and persuasive advertising strategies. We show that as the firms’ horizontal differentiation increases, the firm with a lower value-added product tends to increase persuasive advertising whereas its competitor tends to reduce advertising. Second, the firm receiving a favorable shock in product valuation will complement the favorable change with additional persuasive advertising rather than reduce advertising spending. Third, an equal improvement in advertising efficiency in the industry will lower the profits for both firms whereas a decrease in advertising efficiency in the industry can benefit both firms. Fourth, a larger shock that improves a firm’s product valuation or unit cost is more likely to induce higher advertising spending in the industry. Lastly, an exogenous increase in the separation between firms’ product valuations or perceived qualities may actually reduce the price dispersion in the industry.

Keywords: competitive strategy, persuasive advertising, pricing, product differentiation, competition, marketing

Suggested Citation

Jiang, Baojun and Srinivasan, Kannan, Pricing and Persuasive Advertising in a Differentiated Market (April 6, 2015). Available at SSRN: https://ssrn.com/abstract=2592837 or http://dx.doi.org/10.2139/ssrn.2592837

Baojun Jiang (Contact Author)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
3149353315 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

Kannan Srinivasan

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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