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: A comprehensive survey of the economic analysis of advertising can be found in this article, with a focus on positive and normative theories of monopoly advertising, price and non-price advertising, theories of advertising and product quality, and theories that explore the potential role for advertising in deterring entry.
Abstract: This chapter offers a comprehensive survey of the economic analysis of advertising. A first objective is to organize the literature in a manner that clarifies what is known. A second objective is to clarify how this knowledge has been obtained. The chapter begins with a discussion of the key initial writings that are associated with the persuasive, informative and complementary views of advertising. Next, work that characterizes empirical regularities between advertising and other variables is considered. Much of this work is conducted at the inter-industry level but important industry studies are also discussed. The chapter then offers several sections that summarize formal economic theories of advertising. In particular, respective sections are devoted to positive and normative theories of monopoly advertising, theories of price and non-price advertising, theories of advertising and product quality, and theories that explore the potential role for advertising in deterring entry. At this point, the chapter considers the empirical support for the formal economic theories of advertising. A summary is provided of empirical work that evaluates the predictions of recent theories of advertising, including work that specifies and estimates explicitly structural models of firm and consumer conduct. This work is characterized by the use of industry (or brand) and even household-level data. The chapter then considers work on endogenous and exogenous sunk cost industries. At a methodological level, this work is integrative in nature: it develops new theory that delivers a few robust predictions, and it then explores the empirical relevance of these predictions at both inter-industry and industry levels. Finally, the chapter considers new directions and other topics. Here, recent work on advertising and media markets is discussed, and research on behavioral economics and neuroeconomics is also featured. A final section offers some concluding thoughts.
924 citations
Cites background from "Advertising and Coordination"
...117Milgrom and Roberts offer an information-theoretic foundation for Bain’s (1949) prediction that an incumbent can deter entry by limit pricing....
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TL;DR: In this article, the authors provide empirical evidence that a firm's overall visibility with investors, as measured by its product market advertising, has important consequences for the stock market and show that firms with greater advertising expenditures, ceteris paribus, have a larger number of both individual and institutional investors, and better liquidity of their common stock.
Abstract: We provide empirical evidence that a firm's overall visibility with investors, as measured by its product market advertising, has important consequences for the stock market. Specifically we show that firms with greater advertising expenditures, ceteris paribus, have a larger number of both individual and institutional investors, and better liquidity of their common stock. Our findings are robust to a variety of methodological approaches and to various measures of liquidity. These results sug
575 citations
TL;DR: This article examined the differences in reviews for a given hotel between two sites: Expedia.com (only a customer can post a review) and TripAdvisor (anyone can post) and showed that the net gains from promotional reviewing are highest for independent hotels with single-unit owners and lowest for branded chain hotels with multiunit owners.
Abstract: Firms' incentives to manufacture biased user reviews impede review usefulness. We examine the differences in reviews for a given hotel between two sites: Expedia.com (only a customer can post a review) and TripAdvisor.com (anyone can post). We argue that the net gains from promotional reviewing are highest for independent hotels with single-unit owners and lowest for branded chain hotels with multiunit owners. We demonstrate that the hotel neighbors of hotels with a high incentive to fake have more negative reviews on TripAdvisor relative to Expedia; hotels with a high incentive to fake have more positive reviews on TripAdvisor relative to Expedia. (JEL L15, L83, M31)
462 citations
TL;DR: In this article, the authors examine hotel reviews, exploiting the organizational differences between two travel websites: Expedia.com and Tripadvisor.com, and show that hotels with a high incentive to fake have a greater share of five-star (positive) reviews on TripAdvisor relative to Expedia, and that the hotel neighbors of hotels with high incentives to fake had more one and two star (negative) reviews compared to the non-faking hotels.
Abstract: Online reviews could, in principle, greatly improve the match between consumers and products. However, the authenticity of online user reviews remains a concern; firms have an incentive to manufacture positive reviews for their own products and negative reviews for their rivals. In this paper, we marry the diverse literature on economic subterfuge with the literature on organizational form. We undertake an empirical analysis of promotional reviews, examining both the extent to which fakery occurs and the market conditions that encourage or discourage promotional reviewing activity. Specifically, we examine hotel reviews, exploiting the organizational differences between two travel websites: Expedia.com, and Tripadvisor.com. While anyone can post a review on Tripadvisor, a consumer could only post a review of a hotel on Expedia if the consumer actually booked at least one night at the hotel through the website. We examine differences in the distribution of reviews for a given hotel between Tripadvisor and Expedia. We show in a simple model that the net gains from promotional reviewing are likely to be highest for independent hotels that are owned by single-unit owners and lowest for branded chain hotels that are owned by multi-unit owners. Our methodology thus isolates hotels with a disproportionate incentive to engage in promotional reviewing activity. We show that hotels with a high incentive to fake have a greater share of five star (positive) reviews on Tripadvisor relative to Expedia. Furthermore, we show that the hotel neighbors of hotels with a high incentive to fake have more one and two star (negative) reviews on Tripadvisor relative to Expedia.
427 citations
Cites background from "Advertising and Coordination"
...…its product through the amount of resources invested into advertising (see Nelson (1974), Milgrom and Roberts (1986), Kihlstrom and Riordan (1984), Bagwell and Ramey (1994), Horstmann and Moorthy (2003)) or the advertising content (Anand and Shachar (2009), Anderson and Renault (2006), Mayzlin…...
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TL;DR: A comprehensive survey of the economic analysis of advertising can be found in this article, with a focus on positive and normative theories of monopoly advertising, price and non-price advertising, theories of advertising and product quality, and theories that explore the potential role for advertising in deterring entry.
Abstract: This chapter offers a comprehensive survey of the economic analysis of advertising. A first objective is to organize the literature in a manner that clarifies what is known. A second objective is to clarify how this knowledge has been obtained. The chapter begins with a discussion of the key initial writings that are associated with the persuasive, informative and complementary views of advertising. Next, work that characterizes empirical regularities between advertising and other variables is considered. Much of this work is conducted at the inter-industry level but important industry studies are also discussed. The chapter then offers several sections that summarize formal economic theories of advertising. In particular, respective sections are devoted to positive and normative theories of monopoly advertising, theories of price and non-price advertising, theories of advertising and product quality, and theories that explore the potential role for advertising in deterring entry. At this point, the chapter considers the empirical support for the formal economic theories of advertising. A summary is provided of empirical work that evaluates the predictions of recent theories of advertising, including work that specifies and estimates explicitly structural models of firm and consumer conduct. This work is characterized by the use of industry (or brand) and even household-level data. The chapter then considers work on endogenous and exogenous sunk cost industries. At a methodological level, this work is integrative in nature: it develops new theory that delivers a few robust predictions, and it then explores the empirical relevance of these predictions at both inter-industry and industry levels. Finally, the chapter considers new directions and other topics. Here, recent work on advertising and media markets is discussed, and research on behavioral economics and neuroeconomics is also featured. A final section offers some concluding thoughts.
292 citations
References
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TL;DR: In this article, it is argued that stability does not fully capture the logic of forward induction and that a large part of non-cooperative game theory may have to be modified in an essential way if one accepts stable equilibrium as the solution concept.
232 citations
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TL;DR: In this paper, it is argued that stability does not fully capture the logic of forward induction and that a large part of non-cooperative game theory may have to be modified in an essential way if one accepts stable equilibrium as the solution concept.
Abstract: This paper is an attempt to throw some light on the issues of whether requiring an equilibrium to be stable (in the sense of Kohlberg and Mertens) is necessary for self-enforcingness and what the implications of such a requirement are. In the first part it is discussed which role “mistakes” play in the stability concept and it is argued that stability does not fully capture the logic of forward induction. The second half is devoted to specific examples that show the power of stability and that indicate that a large part of noncooperative game theory may have to be modified in an essential way if one accepts stable equilibrium as the solution concept.
225 citations
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TL;DR: In this paper, the authors introduce a model of the retail firm in which consumers and active firms benefit collectively from coordination of sales at fewer firms, and show that ostensibly uninformative advertising plays a key role in bringing about coordination economies, by directing consumer search toward firms that offer the best deals.
Abstract: We introduce a model of the retail firm in which consumers and active firms benefit collectively from coordination of sales at fewer firms. Using this model, we show that ostensibly uninformative advertising plays a key role in bringing about coordination economies, by directing consumer search toward firms that offer the best deals. Optimal consumer search takes the form of a simple rule of thumb that uses observed advertising information to guide search. Both industry concentration and social surplus are higher in the presence of advertising, relative to a no-advertising benchmark. (JEL D83, L15) Many observed advertisements seem to be at odds with rational behavior. In a variety of ads, mostly on TV and radio, multiproduct sellers provide little hard information, choosing instead to impart only vague slogans that are suggestive of good deals. Examples are plentiful: a hardware store
165 citations
TL;DR: In this article, the authors show that the no-distortion equilibrium is the only refined separating equilibrium and that plausible pooling equilibria fail to exist or involve downward distortions in preentry prices.
Abstract: We expand Milgrom and Roberts' (1982) limit pricing model to allow for multiple incumbents. Each incumbent is informed as to the level of an industry cost parameter and selects a preentry price while a single entrant observes each incumbent's preentry price. We find that incumbents are unable to coordinate deception, which results in a separating equilibrium in which preentry prices are not distorted. Further, introducing the refinement of unprejudiced beliefs, we show that the no-distortion equilibrium is the only refined separating equilibrium. Plausible pooling equilibria fail to exist or involve downward distortions in preentry prices.
147 citations
TL;DR: In this paper, the authors consider extensions of games where some players have the option of signaling future actions by incurring costs, and they show that if one player can incur costs, then forwards induction selects her most preferred outcome.
145 citations