Working Paper: CEPR ID: DP8756
Authors: Simon P. Anderson; Rgis Renault
Abstract: We extend the persuasion game to bring it squarely into the economics of advertising. We model advertising as exciting consumer interest into learning more about the product, and determine a firm's equilibrium choice of advertising content over quality information, price information, and horizontal match information. Equilibrium is unique whenever advertising is necessary. The outcome is a separating equilibrium with quality unravelling. Lower quality firms need to provide more information. For a given quality level, as a function of consumer visit costs, first quality information is disclosed, then price information and then horizontal product information are added to the advertising mix. Some suggestive evidence is provided from airline ads in newspapers.
Keywords: advertising; content analysis; information; persuasion game; search
JEL Codes: D42; L15; M37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| product quality (L15) | advertising content (M37) |
| search costs (D23) | advertising strategy (M30) |
| equilibrium state of the market (D53) | advertising content (M37) |
| advertising content (M37) | consumer engagement (D16) |
| consumer engagement (D16) | purchase decisions (D12) |