Advertising and Coordination
TL;DR: In this article, the authors provide a theoretical explanation for Benham's empirical association of the ability to advertise with lower prices and larger scale, and show that advertising becomes necessary for optimal coordination when the identity of the efficient firm is uncertain.
Abstract: When market information such as price is difficult to communicate, consumers and firms may be unable to take advantage of mutually beneficial scale economies, so that coordination failures arise. Ostensibly uninformative advertising expenditures can be used to eliminate coordination failures, by allowing an efficient firm to communicate implicitly that it offers a low price. This provides a theoretical explanation for Benham's (1972) empirical association of the ability to advertise with lower prices and larger scale. Advertising becomes necessary for optimal coordination when the identity of the efficient firm is uncertain. An application to loss-leader pricing is developed.
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01 Jan 1999
TL;DR: In this paper, the authors consider an equilibrium refinement in signalling games by allowing agents to perform costly tests of beliefs by burning money, and apply the refinement in a model where the public is unsure about the ability of an agent such as a government to foresee the effects of long-term decisions.
Abstract: We consider an equilibrium refinement in signalling games by allowing agents to perform costly tests of beliefs by burning money. We apply the refinement in a model where the public is unsure about the ability of an agent, such as a government, to foresee the effects of long-term decisions. Agents with much information about the consequences of decisions should invest either immediately or never. Poorly informed agents should wait for better information. We identify pooling equilibria in which excessive rush or waiting occurs. The burning money refinement eliminates rash and waiting distortions, but it implies wasting money and, for high discount factors, a decrease in welfare. We also identify the conditions under which the public should allow the agent to burn the public’ s money.
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TL;DR: In this article, a model based on switching costs and technological uncertainty was developed to explain some aspects of the price dynamics of e-commerce, where firms initially charge low prices to build a customer base and if firms fail to reduce costs and reservations prices are low, firms exit the industry.
Abstract: This paper develops a model based on switching costs and technological uncertainty, which explains some aspects of the price dynamics of e-commerce. Switching costs and intertemporal cost correlation lock-in consumers. Firms initially charge low prices to build a customer base. If firms fail to reduce costs, and reservations prices are low, firms exit the industry. Over time, prices increase if no exit occurs, and decrease if exit occurs. Prices may also decrease over time, if the proportion of low search cost consumers increases.
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01 Jun 2001TL;DR: A model is developed where e-commerce: reduces consumers search costs, involves trade-offs for consumers, and reduces retailing costs, and why prices may be higher on-line.
Abstract: This paper explains four things in a unified way. First, how e-commerce can generate price
equilibria, where physical shops either compete with virtual shops for consumers with Internet
access, or alternatively, sell only to consumers with no Internet access. Second, how these price
equilibria might involve price dispersion on-line. Third, why prices may be higher on-line. Fourth,
why established firms can, but need not, be more reluctant than newly created firms to adopt ecommerce.
For this purpose we develop a model where e-commerce reduces consumers’ search
costs, involves trade-offs for consumers, and reduces retailing costs.
Se explica la competencia entre las tiendas fisicas y las tiendas virtuales, concluyendose como el comercio electronico reduce los costes de busqueda de los consumidores, implica un "trade-off" para los consumidores, y disminuye los costes de produccion de las empresas.
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TL;DR: In this paper, the authors compare the performance of controlled-by-owner and sleeping-owning firms in monopoly, perfect competition, and mixed duopoly setting and show that both types have lower output than comparable sleeping-owner firms.
Abstract: When they actively control the firm, owners select the firm that has the best profit rate if the hypothesis of mobility of capital is adopted: controlled-by-owner firms are profit-rate-maximizing when sleeping-owner firms are pure-profit-maximizing. Both types are compared in monopoly, in perfect competition, in classical or in mixed duopoly. Always, controlled-by-owner firms have a lower output than comparable sleeping-owner firms. It only takes a fixed coefficient of equity capital to do that price plays no role for controlled-by-owner firms in perfect competition; in duopoly, it only takes a similar condition plus a linear demand to do that reaction functions vanish.
DOI•
TL;DR: The authors examined the relationship between brand capital and firms' credit ratings and found that firms with higher levels of brand capital are associated with more favorable credit ratings, and that this relationship is more salient for firms with high levels of information asymmetry and more financial and distress risk.
Abstract: We examine the relationship between brand capital and firms’ credit ratings. Using a sample of 5,787 publicly listed U.S. firm-year observations over the 1994–2017 period, we provide evidence that firms with higher levels of brand capital are associated with more favorable credit ratings. In cross-sectional analyses, we find that this relationship is more salient for firms with higher levels of information asymmetry and more financial and distress risk, and for firms with weak governance. In additional analysis, we find a negative relationship between brand capital and the implied cost of equity capital. Our results are robust to alternative measures of brand capital, an alternative regression model and endogeneity tests. Overall, our findings suggest that brand capital captures important financial and non-financial information, and that credit rating agencies, sensibly, consider brand capital in their assessment of firms’ credit worthiness.
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6,100 citations
TL;DR: In this article, the authors argue that consumers lack full information about the prices of goods, but their information is probably poorer about the quality variation of products simply because the latter information is more difficult to obtain.
Abstract: Consumers are continually making choices among products, the consequences of which they are but dimly aware. Not only do consumers lack full information about the prices of goods, but their information is probably even poorer about the quality variation of products simply because the latter information is more difficult to obtain. One can, for example, readily determine the price of a television set; it is more difficult to determine its performance characteristics under various conditions or its expected need for repairs. This article contends that limitations of consumer information about quality have profound effects upon the market structure of consumer goods. In particular, monopoly power for a consumer good will be greater if consumers know about the quality of only a few brands of that good. This is a significant departure from the literature. Economists have long been interested in the determinants of monopoly power, but studies have always concentrated on the production function or market-size variables. I try to show that consumer behavior is also relevant to the determination of monopoly power in consumer industries. Location theory has also ignored the consumer's lack of information. Since many trips to a store are, in part, quests for information, the location of retail stores can be profoundly affected by consumer efforts to acquire information. I shall also try to show that advertising and inventory policy are affected by consumer ignorance about quality differences among brands. All of these impacts of consumer ignorance have remained unexplored because economists have not developed a systematic analysis of consumer quests for information about quality differences. Information about quality differs from information about price because the former is usually more expensive to buy than the latter. Indeed this is one reason we expect the variance in the utility of quality facing a consumer to be greater than the variance in the utility of price. This difference in the price of information can lead to fundamentally
5,548 citations
TL;DR: The conditions under which transactors can use the market (repeat-purchase) mechanism of contract enforcement are examined in this article, where increased price is shown to be a means of assuring contractual performance.
Abstract: The conditions under which transactors can use the market (repeat-purchase) mechanism of contract enforcement are examined. Increased price is shown to be a means of assuring contractual performance. A necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance. This will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm-specific assets. Advertising investments thereby become a positive indicator of likely performance.
3,681 citations
TL;DR: In this paper, the authors present a number of formal restrictions of this sort, investigate their behavior in specific examples, and relate these restrictions to Kohlberg and Mertens' notion of stability.
Abstract: Games in which one party conveys private information to a second through messages typically admit large numbers of sequential equilibria, as the second party may entertain a wealth of beliefs in response to out-of-equilibrium messages. By restricting those out-of equilibrium beliefs, one can sometimes eliminate many unintuitive equilibria. We present a number of formal restrictions of this sort, investigate their behavior in specific examples, and relate these restrictions to Kohlberg and Mertens` notion of stability.
3,290 citations
TL;DR: In this paper, the major features of the behavior of advertising can be explained by advertising's information function, and it is shown that the most important information conveyed by advertising is simply that the brand advertises.
Abstract: This paper tries to show how the major features of the behavior of advertising can be explained by advertising's information function. For search qualities advertising provides direct information about the characteristics of a brand. For experience qualities the most important information conveyed by advertising is simply that the brand advertises. This contrast in advertising by these qualities leads to significant differences in its behavior. How does advertising provide information to the consumer? The producer in his advertising is not interested directly in providing information for consumers. He is interested in selling more of his product. Subject to a few constraints, the advertising message says anything the seller of a brand wishes. A mechanism is required to make the selling job of advertising generate information to the consumer. [Авторский текст]
3,065 citations