13/02/2013
Comparative versus Informative Advertising in Oligopolistic Markets

Comparative versus Informative Advertising in Oligopolistic Markets

The present paper examines endogenously the firms' incentives to invest in informative and comparative advertising, in an oligopolistic market with horizontally differentiated products where competition take place in quantities.

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Comparative advertising, "the 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", has received lately increased attention by business, academics and policy makers since, this aggressive form of advertising has emerged as a prevalent marketing practice in multiple industries. The advertising wars of Pepsi and Coke, Ducking Donuts and Starbucks, or the advertising campaign of Avis, "We try harder", are only few typical examples that describe the daily consumersíexposure to comparative advertising messages. As Pechmann and Stewart (1990) show at the United States Market the 60 % of all the advertising campaigns contains indirect comparative claims, the 20% contains direct comparative claims and only the remaining 20 % contains no comparative claims. Further, Muehling et al. (1990) suggest that almost the 40% of all advertising content is comparative. Clearly, the use of comparative advertising along with self promoting non comparative advertising is extensive in the markets, despite the existed incoclusive empirical evidence regarding the effectiveness of comparative ads in increasing the demand of the product that it promotes. In particular, contrary to the non comparative advertising, such as, informative advertising that Örms use to convey self promoting messages to the consumers (i.e., product information, characteristics, etc.) comparative ads are mainly focused to promote the superiority of a firm's product against the targeted product(s). Thus, comparative advertising give rise to a push-me/pull you effect, that is, a firm is willing via a comparative ad to increase its demand, by promoting its own product and by denigrating the rivalís product (Anderson et al, 2009).

The objective of this paper is to explore endogenously the firms' incentives to invest in comparative and informative advertising, when both types of advertising are available in the market, as well as, the effects of these investments in the market outcomes and the social welfare. In particular, we address the following four questions. First, which is the optimal firms' decisions over the type(s) of advertising that they are going to undertake in order to promote their product? Second, how does the market's features (i.e., the intensity of the market competition, the effectiveness of advertising technology, etc.) affect the firms' investment levels in the two alternative types of advertising? Third, how the firms' advertising investments affect their market performance? Forth, how does the firms' advertising decisions affect the social welfare?

We consider a duopolistic market with horizontally differentiated products, where a-priori consumers do not possess all the relevant information about the products. Firms have on their set of marketing strategies both informative and comparative advertising. Informative advertising transmits all the relevant information to the mass of the consumers that are previously uninformed about the productís characteristics and helps them to identify the product that matches to their needs. Thus, informative advertising increase consumersívaluation of the advertised product and shifts the firm's demand curve outwards. Comparative advertising presents the "positively" advertised product as superior to the rivalís one. Therefore, it increases consumers' valuation for the positively advertised product while, at the same time, it decreases consumersívaluation of the rival firm's product. Firms incur sufficiently high advertising cost both for informative and comparative advertising. The sequence of the moves are as follows. In the first stage of the game the firms decide, independently and simultaneously, upon the type(s) of advertising, as well as, the investment level of each type of advertising that they are willing to undertake in order to promote their product. In the second stage, firms compete in the market by setting their quantities. 

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