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Open Access item Advertising, Brand Loyalty and Pricing

Authors:Chioveanu, Ioana
Keywords:Oligopoly, Advertising, Price dispersion, Brand loyalty
Issue Date:28-Jan-2005
Series/Report no.:UFAE and IAE Working Papers
639.05
Abstract:I construct a model in which an oligopoly first invests in persuasive advertising in order to induce brand loyalty to consumers who would otherwise buy the cheapest alternative on the market, and then competes in prices. Despite ex-ante symmetry, at equilibrium, there is one firm which chooses a lower advertising level, while the remaining ones choose the same higher advertising. For the endogenous profile of advertising expenditure, there are a family of pricing equilibria with at least two firms randomizing on prices. The setting offers a way of modelling homogenous product markets where persuasive advertising creates subjective product differentiation and changes the nature of subsequent price competition. The pricing stage of the model can be regarded as a variant of the Model of Sales by Varian (1980) and the two stage game as a way to endogenize consumers heterogeneity raising a robustness question to Varian’s symmetric setting.
Description:This paper is based on my PhD dissertation (Ch. 2) written under the supervision of Xavier Vives.
URI:http://hdl.handle.net/10261/1767
Appears in Collections:(IAE) Informes y documentos de trabajo

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