ch21 - Chapter 21: Advertising, Competition and Brand Names...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 21: Advertising, Competition and Brand Names 1 Advertising, Competition and Brand Names Chapter 21: Advertising, Competition and Brand Names 2 Introduction Advertising is a weapon in the competition between firms Creating & securing a brand identity can be helpful to consumers Consumers may have a taste for variety; each consumer may like a different version of a particular product Advertising can match consumers with the version they most prefer But advertising can also be an uninformative and wasteful form of competition Evaluation of advertisings competitive role requires an understanding or clear model of how advertising works Consider a simple model where firms can either spend a little or a lot on advertising If advertising by one firm largely cancels the advertising of its rival, then this can result in an advertising war with both firms spending excessively on advertising Chapter 21: Advertising, Competition and Brand Names 3 Advertising as Wasteful Competition Example of a Wasteful Advertising War Gamma ZIP Low Advertising Expenditure High Advertising Expenditure $450, $450 Low Advertising Expenditure High Advertising Expenditure $375, $500 $500, $375 $400,$400 Nash Equilibrium is for both firms to choose the high level of advertising expenditures. This does not maximize their joint profit. Each firms advertising undoes the promotional efforts of its rival. The result is excessive advertising that largely cancels itself out with little gain to consumers and lower profit for firms Chapter 21: Advertising, Competition and Brand Names 4 Advertising, Information, & Product Differentiation Recall the Hotelling Model (Chapter 10) N Consumers distributed uniformly along a line Two firmsone at each end of the line Firm X Firm Y Each consumer is willing to pay V for the basic product But consumers incur transport cost of t per unit of distance traveled to firm Equilibrium prices (with the entire market being served): p 1 = p 2 = c + t Chapter 21: Advertising, Competition and Brand Names 5 Advertising, Information,Product Differentiation (cont.) Now apply Grossman and Shapiro (1984) approach: Each firm chooses advertising expenses aimed at reaching the fraction X or Y of the N consumers From perspective of firm X, a fraction X (1 - Y ) (indicated by x)of consumers will know of its product only and a fraction X Y (indicated by *) will know of both X and Y Firm X...
View Full Document

This note was uploaded on 08/08/2011 for the course EC 170 taught by Professor Menegotto during the Fall '08 term at Tufts.

Page1 / 15

ch21 - Chapter 21: Advertising, Competition and Brand Names...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online