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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TL;DR: In this article, the authors propose a theoretical framework for analyzing the problems associated with unilateral immigration policy in receiving countries and for evaluating the grounds for reform of international institutions governing immigration, and build a model with multiple destination countries and show that immigration policy is influenced by measures adopted abroad as migrants choose where to locate (in part) in response to differences in immigration policy.
36 citations
TL;DR: In this paper, a contrast is made between belief-based and reinforcement learning, where consumers can become locked into the habit of purchasing inferior goods and such lock-in permits the existence of multiple history-dependent asymmetric steady states in which one firm dominates.
Abstract: In a model of dynamic duopoly, optimal price policies are characterized assuming consumers learn adaptively about the relative quality of the two products. A contrast is made between belief-based and reinforcement learning. Under reinforcement learning, consumers can become locked into the habit of purchasing inferior goods. Such lock-in permits the existence of multiple history-dependent asymmetric steady states in which one firm dominates. In contrast, belief-based learning rules must lead asymptotically to correct beliefs about the relative quality of the two brands and so in this case there is a unique steady state.
32 citations
Additional excerpts
...See, for example, Bagwell and Ramey (1994)....
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TL;DR: In this article, the authors show that advertising can have an important function in markets with consumption externalities apart from its persuasive and informative roles, and that advertising may function as a device to coordinate consumer expectations of the purchasing decisions of other consumers.
Abstract: The aim of this article is to demonstrate that advertising can have an important function in markets with consumption externalities apart from its persuasive and informative roles. We show that advertising may function as a device to coordinate consumer expectations of the purchasing decisions of other consumers in markets with consumption externalities. The implications of advertising as a coordinating device are examined in the pricing and advertising decisions of firms interacting strategically. Although, at times, the one-period advertising expense can exceed the one-period monopoly profit, in equilibrium, consumers will pay a premium for the more heavily advertised brand.
32 citations
TL;DR: In this paper, the authors model a firm's decisions about quality investment under differing external and internal environments, and find that costs and benefits of expending resources on quality depend on competitors' price and quality, the persistence of reputation in the marketplace, the relative efficacy of quality improvement efforts and persistence of these efforts over time.
28 citations
TL;DR: The authors developed a coordination model of advertising with consumers observing ads probabilistically and never observing advertising levels, which produces the time series behavior for prices and market share observed in the data and not available from existing coordination models.
Abstract: Many advertised products are established and have little quality variation. For these products advertising signaling explanations are unconvincing. We develop a coordination model of advertising with consumers observing ads probabilistically and never observing advertising levels. Consumers who fail to see an ad for a product believe it will likely have low sales and so be of low value. Firms advertise to avoid these beliefs. The model's predictions on advertising, market share, and profitability are consistent with observed outcomes. The model produces the time series behavior for prices and market share observed in the data and not available from existing coordination models.
28 citations
Cites methods or result from "Advertising and Coordination"
...Our analysis builds on the insight first provided by Bagwell and Ramey (1994) in the context of retail market advertising.3 For our purposes, the credit card market serves as a useful illustration of the coordination problem....
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...8This assumption stands in contrast to Bagwell and Ramey (1994a,1994b) where it is assumed that consumers must search to determine prices....
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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