IESE Research Papers
Abstract: This paper analyzes how advertising can be used to mislead
rivals in an oligopoly environment with demand uncertainty. In particular,
we examine a two-period game in which two firms each sell a differentiated
product whose attractiveness vis-à-vis the competitor's product is unknown.
In each period, a firm sets prices for its product and exerts an
advertising effort that is imperfectly observed by the rival later on.
Advertising is persuasive in that it enhances willingness to pay, but it
can also be used to manipulate rivals' beliefs about initially unobservable
differences in consumers' quality perceptions. In equilibrium, each firm
uses advertising to persuade consumers and to interfere with the rival's
learning about this unknown dimension of demand. This can be done because
the effect of imperfectly observed advertising cannot be separated out of
the effect of the unknown quality differential, which creates a signal
extraction problem for the competitor. There always exists acontinuum of
(symmetric) equilibria, but refining the equilibrium set selects out a
unique one in which firms price in the first-period as in the static
equilibrium, whereas the misinformative usage of advertising makes firms
under advertise if and only if the marginal cost of advertising is high
Keywords: Firms; Productivity; Catalonia; Innovation; (follow links to similar papers)
32 pages, July 15, 2009
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