Coordination in Markets with Consumption Externalities: The Role of Advertising and Product Quality

Tuvana Pastine and Ivan Pastine

No 5152, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies advertising in vertically differentiated product markets with positive consumption externalities. In markets with consumption externalities, the value of the product to the consumer depends on the purchasing decisions of other consumers. In such markets, we show that firms will engage in advertising competition in order to convince consumers of their popularity only as long as they produce goods of similar quality. The firm with the lower quality product will have a greater incentive to advertise. If it is not the brand to provide the greater consumption externality it will have very low market share due to its low intrinsic quality. Hence, in equilibrium, the lower quality product will often be more popular. This provides an additional explanation for the empirical observation that in some markets high quality is associated with lower levels of advertising.

Keywords: Advertising; Consumption externalities; Coordination; Product quality (search for similar items in EconPapers)
JEL-codes: L13 L15 M37 (search for similar items in EconPapers)
Date: 2005-07
New Economics Papers: this item is included in nep-bec, nep-mic, nep-mkt and nep-tid
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Related works:
Working Paper: Coordination in markets with consumption externalities: the role of advertising and product quality (2005)
Working Paper: Coordination in Markets with Consumption Externalities: The Role of Advertising and Product Quality (2000)
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