Effects of Advertising Media and Consumers' Information Structure on Manufacturers' Equilibrium Pricing and Advertising Strategies

Chen, C. M., Chou, S. Y., Huang, S. T., and Zeng, H. W. 2019. Effects of Advertising Media and Consumers' Information Structure on Manufacturers' Equilibrium Pricing and Advertising Strategies. NTU Management Review, 29 (3): 1-38. doi:10.6226/NTUMR.201912_29(3).0001

Chyi-Mei Chen, Department of Finance, National Taiwan University
Shan-Yu Chou, Department of Business Administration, National Taiwan University
Shih-Tsung Huang, Department of Business Administration, National Taiwan University
Huei-Wen Zeng, Department of Business Administration, National Taiwan University

Abstract

This paper intends to investigate how consumers' information structure and the nature of ad-vertising media may affect an incumbent manufacturer's and a potential entrant's incentives to perform informative advertising, and how these advertising decisions may affect the two manufacturers' subsequent pricing behavior and thus the potential entrant's entry decision. Assuming that consumer gross valuations are high enough, we obtain the following results. First, except in the case where the incumbent manufacturer is endowed with a very large loyal base, the incumbent's informative advertising through mass media helps deter entry. Second, in case that informative advertising fails to deter entry and that neither firm has a dominant loyal base, then the post-entry price competition crucially depends on the nature of the advertising medium used by the two firms. If they use a similar mass medium with a high reach rate, then the informative advertising performed by the incumbent will intensify their price competition. Third, when both firms have to use similar mass media should they wish to perform informative advertising, then it is unlikely that the incumbent manufacturer conducts informative advertis-ing in equilibrium. Finally, when the incumbent can use an efficient targeted medium, the in-cumbent's informative advertising tends to benefit both manufacturers. 


Keywords

informative advertisinginformation asymmetrypricing strategiesgame-theoretical modelentry deterrence


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