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Advertising as Distortion of Learning in Markets with Network Externalities

Author

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  • Brekke, Kjell Arne

    (The Ragnar Frisch Centre for Economic Research)

  • Rege, Mari

    (University of Stavanger)

Abstract

We present a theory of how advertising can break a lock-in by distorting beliefs about market shares in markets with network externalities. On the background of the availability heuristic we assume that people learn about market shares by observing product adoption of others, but are not able to fully distinguish between observations of real people and …ctitious characters in advertisements. We look at a game between an incumbent and an entrant producing close substitutes. Our analysis shows that if the entrant’s product is of su¢ ciently high quality, then the entrant will use advertising in order to break the lock-in and the incumbent will not advertise at all. However, if the quality di¤erential between the two products is small, then the incumbent may advertise and make it unpro…table for the entrant to break the lock-in.

Suggested Citation

  • Brekke, Kjell Arne & Rege, Mari, 2006. "Advertising as Distortion of Learning in Markets with Network Externalities," Memorandum 24/2006, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2006_024
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    File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2006/Memo-24-2006.pdf
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    References listed on IDEAS

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    Cited by:

    1. Brekke, Kjellr Arne & Nilsen , Tore, 2011. "The Market for Fake Observations," Memorandum 25/2011, Oslo University, Department of Economics.
    2. Brekke, Kjell Arne & Nilssen, Tore, 2015. "Media competition enhances new-product entry: On the market for fake observations," Information Economics and Policy, Elsevier, vol. 31(C), pages 59-66.

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    More about this item

    Keywords

    Advertising; availability heuristic; herding behavior; information; lock-in;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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