When (not) to indulge in ‘puffery’: the role of consumer expectations and brand goodwill in determining advertised and actual product quality

We analyze why some firms advertise product quality at a level different from the actual quality of a product. By considering the interacting effects of product quality and advertising, we develop a dynamic model of consumer expectations about product quality and the development of brand goodwill to determine the optimal values for the decision variables. The model parameters are determined based on prior literature and we use numerical techniques to arrive at the solution. We then derive conditions under which a firm will find it optimal to overstate or understate product quality. The results suggest that quality may be overstated in markets characterized by high price sensitivity, low quality sensitivity, low brand loyalty, and high source credibility, suggesting the need for vigilance on the part of consumers, upper level managers and regulatory authorities in such market conditions. This is important because current regulatory resources are insufficient to reduce deceptive advertising practices (Davis JJ. 1994. Ethics in advertising decision‐making: implications for reducing the incidence of deceptive advertising. Journal of Consumer Affairs 28 : 380–402). Further, the law of deceptive advertising prohibits some advertising claims on the ground that they are likely to harm consumers or competitors (Preston IL, Richards JI. 1993. A role for consumer belief in FTC and Lanham Act deceptive advertising cases. American Business Law Journal 31 : 1–29). Also, Nagler (1993. Rather bait than switch: deceptive advertising with bounded consumer rationality. Journal of Public Economics 51 : 359–378) shows that deceptive advertising causes a net social welfare loss and a public policy effectively preventing deception will improve social welfare. Copyright © 2000 John Wiley & Sons, Ltd.     

MARKET SHARE ANALYSIS: THE CASE OF THE BRITISH BREAKFAST CEREALS INDUSTRY

In this paper the authors apply simple econometric techniques to market share models for brand products in the British breakfast cereals market. Brand product price and advertising coefficients, as estimated by regression equations, are explored in the context of assumed profit and market share maximization, and an attempt is made to evaluate empirically firms' actual marketing strategies.     

Existence of equilibrium in a differential game of spatial competition with advertising

We investigate a differential duopoly game with horizontal product differentiation and advertising efforts aimed at increasing market demand, to show that the standard approach to spatial competition fails to produce a pure-strategy price equilibrium in a dynamic game framework. This holds independently of the shape of the transportation cost function. Then, we introduce an endogenous cost associated with the choice of location and characterise the feedback equilibrium, identifying the necessary and sufficient condition for the existence of the pure-strategy (stationary) price equilibrium. The same condition is singled out for the static game where consumer population is constant. Finally, we show that the static game cannot be viewed as a special case of the dynamic one.     

When Is Advertising a Signal of Product Quality?

A model of advertising is presented in which consumption experience is an imperfect indicator of product quality. In equilibrium, neither price nor advertising signal the quality of newly introduced goods. Advertising of established products can be a signal of quality, but if it is, it must be an imperfect signal leaving residual uncertainty that influences consumers' repurchase decision. A set of observable implications follow.     

Does Advertising Overcome Brand Loyalty? Evidence from the Breakfast‐Cereals Market

In differentiated product markets where consumer preferences are characterized by brand loyalty, an important role for advertising may be to overcome brand loyalty by encouraging consumers to switch to less familiar brands. Using a scanner panel dataset of breakfast-cereal purchases, I find evidence consistent with the hypothesis that advertising counteracts the tendencies of brand loyalty toward repeat purchasing. Equivalently, advertising reduces switching costs in this market. Furthermore, counterfactual experiments demonstrate that in markets with brand loyalty, advertising is an attractive and effective option—relative to alternative promotional activities, such as price discounts—of stimulating demand for a brand .     

Dynamic Competition with Experience Goods

This paper considers dynamic competition in the case in which consumers are only able to learn about their preferences for a certain product after experiencing it. After trying a product a consumer has more information about that product than about untried products. When competing in such a market firms with more sales in the past have an informational advantage because more consumers know their products. If products provide a better-than-expected fit with greater likelihood, taking advantage of that informational advantage may lead to an informational disadvantage in the future. This paper considers this competition with an infinite horizon model in a duopoly market with overlapping generations of consumers. Two effects are identified: On one hand marginal forward-looking consumers realize that by purchasing a product in the current period will be charged a higher expected price in the future. This effect results in reduced price sensitivity and higher equilibrium prices. On the other hand, forward-looking firms realize that they gain in the future from having a greater market share in the current period and compete more aggressively in prices. For similar discount factors for consumers and firms, the former effect is more important, and prices are higher the greater the informational advantages. The paper also characterizes oscillating market share dynamics, and comparative statics of the equilibrium with respect to consumer and firm patience, and the importance of the experience in the ex post valuation of the product.     

Advertising Media Planning,Optimal Pricing,and Welfare

This paper analyzes optimal media planning strategies in a pricing‐advertising competition model where firms can use mass and specialized advertising. We find that although targeted advertising avoids the wasting of ads, firms might find it optimal to mix specialized advertising with the mass media. We also show that the characteristics of the specialized media available crucially affect the outcome of price competition between firms, which can range from a full fragmentation of the market into local monopolies to lower average prices (compared to the case where firms had only mass advertising available). Regarding welfare, we prove that although the use of specialized advertising can lower consumer surplus and drive a fragment of consumers out of the market, this advertising technology is welfare‐improving, and can be Pareto superior.     

Share,price and category expenditure—geographic market effects and private labels

Focusing on the interaction between national brands and private labels, this paper has two main empirical contributions: (i) a simultaneous system of demand (share), price and expenditure equations is estimated, and (ii) differences in the structure of the local geographic market are incorporated into the analysis. The former represents an important step in understanding the complete nature of private label and national brand interaction, while the latter is important for understanding the impact of the local retail environment on market behaviour. IRI scanner data from 1991 and 1992 are used to estimate a five‐equation system across 135 food product categories and 59 geographic markets. The results suggest that concentration at both the manufacturer and retailer level can significantly affect private label and national brand price. However, while increased retailer concentration is associated with higher national brand and private label prices, higher manufacturer concentration is associated with higher national brand but lower private label prices. Increases in national brand advertising has the effect of raising national brand price and share, but lowering private label price and share. This is consistent with previous research and suggests that advertising and local market conditions play a significant role in the ability of national brands to price at a premium over private labels. Finally, marketing decision variables, such as display activity and private label distribution, can have an important impact on total category expenditure. Copyright © 1999 John Wiley & Sons, Ltd.     

Analysis of a dynamic, decentralized exchange economy

A model of a dynamic exchange economy is presented. Similarly to the Walrasian equilibrium problem, each consumer is characterized by a feasible set and by an instantaneous demand function, that depends on the price vector, time, and the commodity holding. The commodity holding of each consumer varies, at each moment, according to this instantaneous demand function. We show that the market can choose prices that keep the commodity holding of each consumer within his consumption set, while ensuring that the aggregate commodity holding satisfies the scarcity constraints of the market.     

基于品牌体验的企业—消费者行为模式研究

从品牌体验的视角来重新审视和制定品牌战略将为企业带来新的市场机会和独特的竞争力。从本质上讲,品牌体验具有互动性、情感性、情境性三个基本特性。品牌体验背景下的消费者行为与传统消费行为存在明显差别。"企业─消费者行为模式"通过控制企业行为,创造品牌体验情境去影响消费者行为,使得品牌战略创新的实现成为可能。     

Dynamic competition with consumer inertia

We study a framework where two duopolists compete repeatedly in prices and where chosen prices potentially affect future market shares, but certainly do not affect current sales. This assumption of consumer inertia causes (noncooperative) coordination on high prices only to be possible as an equilibrium for low values of the discount factor. High discount factors increase opportunism and aggressiveness of competition to such an extent that high prices are no longer sustainable as an equilibrium outcome. Moreover, we find that both monopolization and enduring market share and price fluctuations (price wars) can be equilibrium path phenomena without requiring exogenous shocks in market or firm characteristics.     

The system of towns with spatial public goods

In this paper, we introduce a model of ‘spatial public goods’, whose provision costs depend on the size of the benefit area. It is assumed that there are many developers providing spatial public goods in their towns. Each developer chooses the area size of his/her town and the quality of its spatial public good so as to maximize profit, taking the market price system as given. Each consumer chooses the level of the public good, and hence the town that supplies it, so as to maximize his/her utility. We show that the competitive equilibrium allocation of this economy is efficient.     

Customer Directed Advertising and Product Quality

This paper studies the relationship between three key elements of the marketing mix, namely, price, product, and promotion, in a model where a seller employs informative advertising to launch a new product. We propose a fairly general advertising technology for the study of three promotional strategies—mass, imperfectly targeted, and customer directed advertising (CDA). We find that both the private and the social incentives to use distinct advertising strategies are aligned, and that sales are likely to be promoted through CDA. Compared to mass advertising, with CDA the social planner reduces quantity and downgrades quality whereas the seller sometimes upgrades it. Our model of targeting with endogenous product quality provides some new insights into the way the transition from mass to specialized advertising can affect market outcomes. Quality distortions imply that (i) even if CDA increases the market price, the degree of market power need not increase and (ii) CDA may yield a welfare loss even if it leads to a lower market price.     

Upstream Pricingand Advertising Signal Downstream Demand

This paper considers price and advertising decisions by a monopolist manufacturer who is privately informed about the strength of consumer demand. Consumers respond to advertising and to the retail price chosen by an uninformed retailer on the basis of his beliefs about demand. This signaling game has a unique intuitive equilibrium outcome in which a high-demand manufacturer chooses his full-information pair of wholesale price and advertising. When demand is low, the wholesale price is distorted downward from its full information level, whereas demand-enhancing advertising may be distorted in either direction. Dissipative advertising is not distorted because it is never used.     

基于信息不对称房价博弈模型的优化均衡研究

目前我国住宅市场存在严重的信息不对称,如何进行规制引起多方关注。首先利用房价博弈模型研究我国住宅市场信息不对称下的非理性均衡和精炼优化的序贯均衡,进而探求政府对市场房价经济优化规制后的理性序贯均衡,以此提出政府对住宅产业的规制方式和对策建议。     

Forecasting the effect of an environmental change on market performance: An intervention time-series approach

Forecasting the effects of changes in advertising or pricing strategies on a company's sales or market share is an important task faced by marketing managers. This paper applies a time series approach, intervention analysis, to several marketing policy applications illustrating the flexibility and value of the method for testing hypotheses and providing forecasts. Empirical evidence is presented for two different marketing situations, one that involves a change in advertising and another that involves offering price specials.     

Integration, Complementary Products, and Variety

This paper examines the incentives for integration when the market for consumer durables (hardware) is oligopolistic and the market for complementary services (software) is monopolistically competitive. We find that the equilibrium industry structure will depend on the magnitude of the fixed costs of software development. If the software development costs are relatively large, the equilibrium industry structure is unintegrated, that is, neither hardware firm integrates; if the software development costs are relatively small, the equilibrium industry structure is integrated, that is, both hardware firms integrate. Under the integrated industry structure, hardware profits are lower, less varieties are provided, and hardware prices are lower than under the unintegrated industry structure. The game has a prisoners' dilemma structure when the software development costs are relatively small because of a foreclosure effect. Strategically increasing the number of software varieties provides an avenue for an integrated hardware firm to increase its market share and profits by reducing the number of software varieties available for an unintegrated rival technology. Although consumer surplus is higher under an integrated industry structure, the total surplus associated with the unintegrated industry structure exceeds that of the integrated industry structure.     

The economics of retail firms

This paper identifies retail firms as an economic institution which delivers explicit products or services to consumer together with a variety of distribution services that determine the levels of distribution costs experienced by consumers in their purchase activities. The demand for the retailer's product is derived from a household production model in which the levels of distribution services provided by the retailer play the role of fixed inputs in the household's production functions. The supply of the retailer's product is derived from a joint cost function which is non-decreasing in the levels of distribution services provided. Profit-maximizing behavior in monopolistically competive markets shows that retail firms have special economic incentives to become complex organizations by integrating backwards, offering multiple explicit products and operating in more than one market. In addition, monopolistically competitive retail firms in long-run equilibrium will exhibit excess capacity, price dispersion and product choice in distribution services.     

Multibrand pricing as a strategy for consumer search obfuscation in online markets

This paper argues that a firm with multiple brands can obfuscate consumer search by excluding the brands of other firms from a consumer's consideration set. This is examined empirically by regressing price data for a leading U.K. motor insurance price comparison site (or “shopbot”). It finds that multibrand firms own three‐quarters of brands in this market, and that allowing for other brand strategies, they post significantly lower and clustered prices relative to other firms. The firms also conceal their brand ownership, consistent with search obfuscation. The results are not otherwise explained and they have implications for market competitiveness.     

Product Rivalry with multiple Strategic weapons: an Analysis of price and advertising Competition

A dynamic model of product rivalry is developed for a market in which firms choose price and advertising intensity. The model, a state-space game, is implemented using data that consist of weekly price, sales, and promotional activity for four brands of saltine crackers sold by four chains of grocery stores in a small town. A number of questions can be asked of this data. First, is advertising predatory (merely changing market shares) or cooperative (shifting out market demand)? Second, are price and advertising own and cross-strategic complements or substitutes? And finally, do investments in stocks of goodwill and in price reductions make firms tough and aggressive or soft and accommodating?