Abstract

This paper intends to investigate how consumers' information structure and the nature of advertising media may affect an existing manufacturer and a potential entrant's incentives to perform informative advertising, and how these advertising decisions may affect these manufacturers' subsequent pricing behavior and thus the potential entrant's entry decision. With the assumption that consumer gross valuations are high, we obtained the following results. Firstly, 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. Secondly, in a case where 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 high reach rate, then the informative advertising performed by the incumbent will intensify their price competition. Thirdly, when both firms use similar mass media to perform informative advertising, it is unlikely that the incumbent manufacturer conducts informative advertising in equilibrium. Finally, when the incumbent can use an efficient targeted medium, the incumbentʼs informative advertising tends to benefit both manufacturers.  

Keywords

informative advertisinginformation asymmetrypricing strategiesgame-theoretical modelentry deterrence