Working Paper: CEPR ID: DP3953
Authors: Charalambos Christou; Nikolaos Vettas
Abstract: We study informative advertising within a random-utility, non-localized competition model of product differentiation. In a symmetric equilibrium, advertisement is sub-optimal when product differentiation is small, and excessive otherwise. Increasing the number of firms may increase or decrease the market price. We emphasise that quasi-concavity of profits may fail, as firms may prefer a high price deviation, targeting consumers that only become informed about their product (a feature that, while present in earlier models of informative advertising, has not received enough attention). As product differentiation becomes small, a symmetric equilibrium does not exist.
Keywords: informative advertising; nonlocalized competition; product differentiation; random utility
JEL Codes: D83; L13; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| informative advertising (M38) | market prices (P22) |
| product differentiation (L15) | symmetric equilibrium (D50) |
| advertising costs (M37) | equilibrium advertising levels (D53) |
| advertising expenditures (M37) | firm pricing strategies (L11) |
| number of firms (L20) | market prices (P22) |
| number of firms (L20) | profits (L21) |
| product differentiation (L15) | advertising provision (M38) |