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Advertising and Coordination in Markets with Consumption Scale Effects

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  • C. Robert Clark
  • Ignatius J. Horstmann

Abstract

Many advertised products are established and have little quality variation. For these products advertising signaling explanations are unconvincing. We develop a coordination model of advertising with consumers observing ads probabilistically and never observing advertising levels. Consumers who fail to see an ad for a product believe it will likely have low sales and so be of low value. Firms advertise to avoid these beliefs. The model's predictions on advertising, market share, and profitability are consistent with observed outcomes. The model produces the time series behavior for prices and market share observed in the data and not available from existing coordination models.

Suggested Citation

  • C. Robert Clark & Ignatius J. Horstmann, 2005. "Advertising and Coordination in Markets with Consumption Scale Effects," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(2), pages 377-401, June.
    • Handle: RePEc:bla:jemstr:v:14:y:2005:i:2:p:377-401
    DOI: 10.1111/j.1530-9134.2005.00045.x
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    Cited by:

    1. Pepall, Lynne & Reiff, Joseph, 2016. "The “Veblen” effect, targeted advertising and consumer welfare," Economics Letters, Elsevier, vol. 145(C), pages 218-220.
    2. Chen, Jihui & Waters, George, 2017. "Firm efficiency, advertising and profitability: Theory and evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 240-248.
    3. Whelan Adele, 2019. "Entry Deterrence, Coordinating Advertising and Pricing in Markets with Consumption Externalities," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(2), pages 1-16, June.
    4. Ivan Pastine & Tuvana Pastine, 2011. "Coordination In Markets With Consumption Externalities: Advertising And Product Quality," Manchester School, University of Manchester, vol. 79(1), pages 45-62, January.
    5. Alexei Parakhonyak & Nick Vikander, 2019. "Optimal Sales Schemes for Network Goods," Management Science, INFORMS, vol. 65(2), pages 819-841, February.
    6. Ramendra Pratap Singh & Neelotpaul Banerjee, 2018. "Exploring the Influence of Celebrity Credibility on Brand Attitude, Advertisement Attitude and Purchase Intention," Global Business Review, International Management Institute, vol. 19(6), pages 1622-1639, December.
    7. Ivan Pastine & Tuvana Pastine, 2000. "Coordination in Markets with Consumption Externalities : The Role of Advertising and Product Quality," Working Papers 0003, Department of Economics, Bilkent University.
    8. C. Robert Clark & Ignatius J. Horstmann, 2013. "A model of advertising format competition: on the use of celebrities in ads," Canadian Journal of Economics, Canadian Economics Association, vol. 46(4), pages 1606-1630, November.
    9. Kretschmer, Tobias & Rösner, Mariana, 2010. "Increasing Dominance - the Role of Advertising, Pricing and Product Design," Discussion Papers in Business Administration 11500, University of Munich, Munich School of Management.
    10. Sahuguet, Nicolas, 2011. "A model of repeat advertising," Economics Letters, Elsevier, vol. 111(1), pages 20-22, April.

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