29/08/2013
Comparative Advertising in Markets with Network Externalities

Comparative Advertising in Markets with Network Externalities

The present paper investigates the firms' incentives to invest in comparative advertising in a spatially differentiated duopoly market characterized by network externalities.

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Advertising and its' effects in markets that are characterized by consumption externalities have attracted lately the interest of the academic community, since in such market the consumersí decisions to purchase a product do not depend only on the product's physical characteristics but it depends also on the number of the agents that use the same product (Katz and Sharipo, 1985; Veblen, 1899). Thus, the firms' advertising apart from its' informative and persuasive role, it can be further used as a device in order to alter the consumers' expectations about the products' network size in the market (Pastine and Pastine, 2002; Clark and Hostmann, 2005; Pastine and Pastine, 2011). However, and though the economic literature has extensively analyzed the coordination role of advertising in the aforementioned markets, the existing literature has ignored so far the effects that more aggressive forms of advertising, such as comparative advertising, ìthe form of advertising that compares rivals brands on objectively measurable attributes or price, and identifies the rival brand by name, illustration or other distinctive information, could have in markets characterized by network externalities.

In the present paper we investigate the firms' incentives to invest in comparative advertising in a spatially differentiated duopoly characterized by networks externalities and the effects of such investments on the marketís outcomes. The idea that drives our paper can be illustrated taking for example the Orange's comparative advertising campaign in 1994, "On average, Orange users save more than 20£ per month, compared to the Vodafone's and Cellnet's equivalent tariffis". Clearly, the aforementioned advertising campaign promotes the superiority of the Orange's tariffis against the Vodafone's and the Cellnet's tariffis. That means that, it targets to increase the consumers' valuation over the Orange's product, while, at the same time, it targets to decrease the consumers' valuation over both the Vodafone's and the Cellenet's products. However, given that the products are characterized by consumption externalities, even if the message of the comparative advertising is true, the consumers that are exposed to such comparative advertising messages are going to evaluate also the expected network size of each product, since they are willing to participate in the most widely used network. Thus, a number of questions arise with regard to the firms' incentives to invest in comparative advertising when the market is characterized by network externalities. In particular, in the present paper we aim to address the following three questions: First, are there any firms' incentives to invest in comparative advertising when the market is characterized by network effects? Second, how do the use of comparative advertising and the network externalities affect the firms' locations? Third, how do the firms' location, comparative advertising and network externalities affect the market performance? 

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