Why Are Branded Goods So Expensive?

18 Pages Posted: 6 Jan 2023 Last revised: 23 Oct 2023

See all articles by Klaus Kultti

Klaus Kultti

University of Helsinki, Department of Political and Economic Studies

Teemu Pekkarinen

Massachusetts Institute of Technology (MIT)

Date Written: October 21, 2023

Abstract

We study the price competition between two firms that have to advertise to reach buyers. We show that differences in advertising strategies can result in price-increasing competition. Advertising can be either informative or persuasive; the former informs buyers about the price of the standard good, and the latter increases buyers' willingness to pay of the branded good. We show that when firms engage in different advertising methods, the pricing is in pure strategies, and if branding is effective, the firm using persuasive advertising asks a price that is higher than the monopoly price of the branded good (and, a fortiori, higher than the monopoly price of the standard good).

Keywords: Advertising, Informative Advertising, Persuasive Advertising, Pricing

JEL Classification: D41, D47

Suggested Citation

Kultti, Klaus and Pekkarinen, Teemu, Why Are Branded Goods So Expensive? (October 21, 2023). Available at SSRN: https://ssrn.com/abstract=4317792 or http://dx.doi.org/10.2139/ssrn.4317792

Klaus Kultti

University of Helsinki, Department of Political and Economic Studies ( email )

Teemu Pekkarinen (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

HOME PAGE: http://www.teemupekkarinen.com

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