Persuasive Advertising in a Vertically Differentiated Market

55 Pages Posted: 30 Jun 2019

See all articles by W. Jason Choi

W. Jason Choi

Rutgers Business School

Kinshuk Jerath

Columbia University - Columbia Business School

Miklos Sarvary

Columbia Business School - Marketing

Date Written: October 3, 2018

Abstract

We study a scenario in which firms offering products of different qualities can use persuasive advertising to influence consumers' preferences and perceptions about product quality. Consumers have an absolute and a relative component of utility from quality, and derive diminishing marginal utility of quality (e.g., due to loss aversion from qualities below a reference point). We consider two types of effects of ads: influencing a consumer's valuation of quality relative to price (valuation shifting), and influencing a consumer's reference point against which she evaluates quality (reference shifting). We find that a monopolist only uses ads that increase total utility from a product. However, competing firms may use ads that reduce total utility from a product - even their own product (e.g., by making the quality reference point higher) - because they may increase the utility of their offering in comparison with the competing offering, thus placing them in a favorable competitive position. We also find that the faster the marginal utility from quality diminishes, the greater preference firms have for reference-shifting ads over valuation-shifting ads. Interestingly, perceived consumer surplus may decrease if products are less differentiated, even though this leads to higher pricing competition, because of shifts in advertising strategy.

Keywords: advertising strategy, advertising content, loss aversion, quality reference, competition, game theory

Suggested Citation

Choi, W. Jason and Jerath, Kinshuk and Sarvary, Miklos, Persuasive Advertising in a Vertically Differentiated Market (October 3, 2018). Available at SSRN: https://ssrn.com/abstract=3392062 or http://dx.doi.org/10.2139/ssrn.3392062

W. Jason Choi (Contact Author)

Rutgers Business School ( email )

1 Washington Pl
Newark, NJ 07102
United States

Kinshuk Jerath

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Miklos Sarvary

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
21
Abstract Views
624
PlumX Metrics