IDEAS home Printed from https://ideas.repec.org/a/bpj/revmkt/v18y2020i1p145-177n4.html
   My bibliography  Save this article

Persuasive Advertising in a Vertically Differentiated Competitive Marketplace

Author

Listed:
  • Lin Yuanfang

    (Lang School of Business and Economics, University of Guelph, Guelph, ON, Canada)

  • Narasimhan Chakravarthi

    (Olin School of Business, Washington University in St Louis, Saint Louis, MO, USA)

Abstract

Despite the widely acknowledged existence in practice, the theoretical literature on persuasive advertising is generally vague about exactly how such advertising could affect consumer preferences, except for the general assumption that persuasive advertising affects consumer willingness to pay or simply “shifts demand.” This paper proposes a theoretical framework for characterizing different ways that persuasive advertising may affect consumer utility in a vertically differentiated marketplace. Firstly, persuasive advertising could simply raise consumers’ reservation price for the product category. Secondly, persuasive advertising could enhance consumers’ perception about the product quality offered by the advertising firm. Thirdly, persuasive advertising could increase consumers’ willingness to pay for quality increment. Preliminary evidences from lab studies are presented to support the existences of the proposed effects. Using a game-theoretic approach, we study two firms’ decision in the adoption of persuasive advertising of a particular effect and the associated price competition. Findings from the theoretical model analyses indicate that factors influencing a firm’s decision in persuasive advertising include consumer heterogeneity, degree of product differentiation, the effectiveness and the cost of such advertising. In a vertically differentiated competitive marketplace, persuasive adverting is a more desirable strategic tool for firms of higher-quality products to further establish a competitive advantage.

Suggested Citation

  • Lin Yuanfang & Narasimhan Chakravarthi, 2020. "Persuasive Advertising in a Vertically Differentiated Competitive Marketplace," Review of Marketing Science, De Gruyter, vol. 18(1), pages 145-177, September.
  • Handle: RePEc:bpj:revmkt:v:18:y:2020:i:1:p:145-177:n:4
    DOI: 10.1515/roms-2019-0075
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/roms-2019-0075
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

    File URL: https://libkey.io/10.1515/roms-2019-0075?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bloch, Francis & Manceau, Delphine, 1999. "Persuasive advertising in Hotelling's model of product differentiation," International Journal of Industrial Organization, Elsevier, vol. 17(4), pages 557-574, May.
    2. Dina Mayzlin & Jiwoong Shin, 2011. "Uninformative Advertising as an Invitation to Search," Marketing Science, INFORMS, vol. 30(4), pages 666-685, July.
    3. Gary S. Becker & Kevin M. Murphy, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 941-964.
    4. Dmitri Kuksov & Yuanfang Lin, 2010. "Information Provision in a Vertically Differentiated Competitive Marketplace," Marketing Science, INFORMS, vol. 29(1), pages 122-138, 01-02.
    5. J. Miguel Villas-Boas, 2004. "Communication Strategies and Product Line Design," Marketing Science, INFORMS, vol. 23(3), pages 304-316, January.
    6. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    7. Yuanfang Lin & Sandeep Krishnamurthy, 2017. "Generic and Brand Advertising Strategies Under Inter-Industry Competition," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 4(1), pages 18-27, September.
    8. Laurent Linnemer, 1998. "Entry Deterrence, Product Quality: Price and Advertising as Signals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(4), pages 615-645, December.
    9. K. Sridhar Moorthy, 1988. "Product and Price Competition in a Duopoly," Marketing Science, INFORMS, vol. 7(2), pages 141-168.
    10. Preyas S. Desai, 2001. "Quality Segmentation in Spatial Markets: When Does Cannibalization Affect Product Line Design?," Marketing Science, INFORMS, vol. 20(3), pages 265-283, August.
    11. Meurer, Michael & Stahl, Dale II, 1994. "Informative advertising and product match," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 1-19, March.
    12. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    13. Bagwell, Kyle & Ramey, Garey, 1990. "Advertising and pricing to deter or accommodate entry when demand is unknown," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 93-113.
    14. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    15. Ge, Xin & Messinger, Paul R. & Lin, Yuanfang, 2019. "Gleaning inferences from soldout products," Journal of Retailing and Consumer Services, Elsevier, vol. 49(C), pages 173-185.
    16. Carl Shapiro, 1980. "Advertising and Welfare: Comment," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 749-752, Autumn.
    17. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
    18. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 465-491.
    19. Gardner, Meryl Paula, 1985. "Mood States and Consumer Behavior: A Critical Review," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 12(3), pages 281-300, December.
    20. Mark B. Vandenbosch & Charles B. Weinberg, 1995. "Product and Price Competition in a Two-Dimensional Vertical Differentiation Model," Marketing Science, INFORMS, vol. 14(2), pages 224-249.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    2. Lola Esteban & José M. Hernández & José Luis Moraga‐González, 2006. "Customer Directed Advertising and Product Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 943-968, December.
    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. Anderson, Simon P. & Gabszewicz, Jean J., 2006. "The Media and Advertising: A Tale of Two-Sided Markets," Handbook of the Economics of Art and Culture, in: V.A. Ginsburgh & D. Throsby (ed.), Handbook of the Economics of Art and Culture, edition 1, volume 1, chapter 18, pages 567-614, Elsevier.
    5. Simon P. Anderson & Régis Renault, 2013. "The Advertising Mix for a Search Good," Management Science, INFORMS, vol. 59(1), pages 69-83, April.
    6. Bing Jing, 2016. "Lowering Customer Evaluation Costs, Product Differentiation, and Price Competition," Marketing Science, INFORMS, vol. 35(1), pages 113-127, January.
    7. Dmitri Kuksov & Yuanfang Lin, 2017. "Signaling Low Margin Through Assortment," Management Science, INFORMS, vol. 63(4), pages 1166-1183, April.
    8. Luo, Zheng & Chen, Xu & Chen, Jing & Wang, Xiaojun, 2017. "Optimal pricing policies for differentiated brands under different supply chain power structures," European Journal of Operational Research, Elsevier, vol. 259(2), pages 437-451.
    9. Justin P. Johnson & David P. Myatt, 2006. "On the Simple Economics of Advertising, Marketing, and Product Design," American Economic Review, American Economic Association, vol. 96(3), pages 756-784, June.
    10. Raphael Boleslavsky & Christopher S. Cotton & Haresh Gurnani, 2017. "Demonstrations and Price Competition in New Product Release," Management Science, INFORMS, vol. 63(6), pages 2016-2026, June.
    11. Nils‐Henrik M. von der Fehr & Kristin Stevik, 1998. "Persuasive Advertising and Product Differentiation," Southern Economic Journal, John Wiley & Sons, vol. 65(1), pages 113-126, July.
    12. Soberman, David A. & Xiang, Yi, 2022. "Designing the content of advertising in a differentiated market," International Journal of Research in Marketing, Elsevier, vol. 39(1), pages 190-211.
    13. Bing Jing, 2017. "Behavior-Based Pricing, Production Efficiency, and Quality Differentiation," Management Science, INFORMS, vol. 63(7), pages 2365-2376, July.
    14. Tingting Nian & Arun Sundararajan, 2022. "Social Media Marketing, Quality Signaling, and the Goldilocks Principle," Information Systems Research, INFORMS, vol. 33(2), pages 540-556, June.
    15. repec:dau:papers:123456789/12407 is not listed on IDEAS
    16. Bing Jing, 2006. "On the Profitability of Firms in a Differentiated Industry," Marketing Science, INFORMS, vol. 25(3), pages 248-259, 05-06.
    17. Bing Jing, 2011. "Seller honesty and product line pricing," Quantitative Marketing and Economics (QME), Springer, vol. 9(4), pages 403-427, December.
    18. Langinier Corinne & Babcock Bruce A., 2008. "Agricultural Production Clubs: Viability and Welfare Implications," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 6(1), pages 1-31, December.
    19. Yi Qian & Qiang Gong & Yuxin Chen, 2015. "Untangling Searchable and Experiential Quality Responses to Counterfeits," Marketing Science, INFORMS, vol. 34(4), pages 522-538, July.
    20. Grunewald, Andreas & Kräkel, Matthias, 2017. "Advertising as signal jamming," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 91-113.
    21. Simon P. Anderson & Régis Renault, 2006. "Advertising Content," American Economic Review, American Economic Association, vol. 96(1), pages 93-113, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:revmkt:v:18:y:2020:i:1:p:145-177:n:4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.