Mass versus Direct Advertising and Product Quality
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This paper analyzes how the use of mass vs. direct advertising can affect the pattern of price and quality competition in a market where two firms compete with vertically differentiated products. We show that, compared to the casewheresellersemployonlymassadvertising,theuseofdatabaseadvertising based on historical sales records improves the competitive position of the lowquality firm, which achieves a larger market share and can obtain higher profits. As a result, the high-quality firm lowers the supply of quality, which decreases the degree of product differentiation in the market and triggers strong price competition, thus decreasing its profits and increasing consumer surplus. Finally,we show that, although database advertising is more cost-efficient than mass advertising, the market distortion in the provision of quality implies that the use of direct advertising can yield a welfare loss.
Abstract
This paper analyzes how the use of mass vs. direct advertising can affect the pattern of price and quality competition in a market where two firms compete with vertically differentiated products. We show that, compared to the casewheresellersemployonlymassadvertising,theuseofdatabaseadvertising based on historical sales records improves the competitive position of the lowquality firm, which achieves a larger market share and can obtain higher profits. As a result, the high-quality firm lowers the supply of quality, which decreases the degree of product differentiation in the market and triggers strong price competition, thus decreasing its profits and increasing consumer surplus. Finally,we show that, although database advertising is more cost-efficient than mass advertising, the market distortion in the provision of quality implies that the use of direct advertising can yield a welfare loss.
참고문헌 (9)
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