Questioning Conventional Wisdom About Competition in Differentiated Markets

Managerial texts are full of conventional wisdom about competitive markets. Examples of such wisdom include the following ideas: (a) for success, differentiation is a strategic imperative, (b) the viability of a firm is seriously threatened when a competitor is significantly better at reaching and communicating with potential consumers and (c) premium pricing in a market with low levels of differentiation is often evidence of collusive behaviour. These ideas are based on analysis where consumers are assumed to have complete and accurate information about the important alternatives in a category. The objective of this paper is to demonstrate the fallibility of these ideas in a general context. The reality of most small-ticket consumer categories is that consumers are not fully informed about all the alternatives. This is because the majority of information for small-ticket purchases comes from advertising and not all potential consumers are exposed to advertising from every brand. By relaxing the simple assumption that consumers are fully informed, I show that the three ideas cited above are frequently incorrect.     

Green Demarketing in Advertisements: Comparing “Buy Green” and “Buy Less” Appeals in Product and Institutional Advertising Contexts

This research compares consumer response to traditional green advertising appeals to that of less conventional, “green demarketing” (GD) appeals—messages by for-profit companies encouraging reduced category consumption for the sake of the environment. Rather than encouraging greener consumption, modern environmentalism calls for decreased consumption overall, a trend reflected in recent advertising campaigns (e.g., Patagonia's “Don't Buy This Jacket”). Despite its potential impact and unconventionality, research on GD in general is sparse, and no empirical research has examined consumer response to GD appeals relative to traditional green appeals. In three experiments, we find that, in the context of product advertising, consumers' attitudes for green ads are more favorable than those for GD ads, mediated by greater inferences of genuine environmental concern. However, we find the reverse pattern in the context of institutional ads. Further, an “anti-consumption amplifier” message embedded in the ad—espousing the potential harm of overconsumption—further boosts favorable consumer attitudes for the GD institutional ad relative to its traditional green counterpart. Importantly, we assess all effects while controlling for consumers' individual levels of green consumerism, such that implications may be applied more generally rather than to a specific segment of green consumers.     

Consumer deliberation and quality signaling

Consumers are often uncertain about their product valuation before purchase. They may bear the uncertainty and purchase the product without deliberation. Alternatively, consumers can incur a deliberation cost to find out their true valuation and then make their purchase decision. This paper proposes that consumer deliberation about product valuation can be an endogenous mechanism to enable credible quality signaling. We demonstrate this point in a simple setup in which product quality influences the probability that the product has high valuation. We show that with endogenous deliberation there may exist a unique separating equilibrium in which the high-quality firm induces consumer deliberation by setting a high price whereas the low-quality firm prevents deliberation by charging a low price. Compared to the case of complete information, the price of the high-quality firm can be distorted upward to facilitate consumer deliberation, or distorted downward to avoid the low-quality firm’s imitation. In an extension we show that dissipative advertising can facilitate quality signaling. The high-quality firm can utilize advertising spending to avert imitation from the low-quality firm without distorting price downward, earning a higher profit than that without advertising. However, advertising mitigates the distortion at the expense of consumer surplus and social welfare.     

Advertising effects on consumer welfare: Prices paid and liking for brands selected

The effect of advertising on consumer welfare has been the subject of dispute among economists, arising largely from disagreement among scholars regarding the persuasive versus the informative role of advertising. This paper reports two experiments that explore the welfare implications of advertising effects. Experiment 1 shows that the same advertisements can either increase or decrease prices paid for selected brands, depending on the degree to which the choice situation requires brands to be recalled in order to be considered. However, an increase in prices paid caused by advertising does not necessarily imply detrimental effects on consumer welfare. Experiment 2 shows that, even under circumstances in which differentiating advertising leads consumers to select brands with higher average prices, it can provide useful information to consumers that allows them to make purchases that are more in line with their personal tastes than are the choices of consumers not exposed to the advertisements.     

Consumer learning, switching costs, and heterogeneity: A structural examination

This paper develops and estimates a model of forward-looking consumer learning with switching costs using household level scanner data from a frequently purchased product category. This is novel because current models of consumer purchase behavior assume that only one of these types of dynamics is present, not both at the same time. My model estimates support the presence of both learning and switching costs in this product category. The estimates show that before consuming new products, consumers are unsure of their tastes for them, and subsequently learn their tastes by purchase and consumption of new products. Switching costs are large, comprising roughly 30 percent of the cost of a medium sized package of the product. Additionally, the model incorporates very rich individual level unobserved heterogeneity in price sensitivities, tastes, and switching costs, and the amount by which consumers learn. To show that my model produces different implications than a model with learning or switching costs only, I estimate two more specifications, one without each type of dynamics, and simulate counterfactuals that are of interest to managers and policymakers. I find that intertemporal elasticities are underestimated when either type of dynamics is left out, by as much as 90%. Informative advertising is also affected by the presence of switching costs, although the direction of the bias is not signed. Leaving out dynamics also has a large impact on long-term elasticities, which are used by antitrust policymakers to evaluate the impact of mergers. When learning is ignored, cross elasticities are underestimated by as much as 45%. When switching costs are ignored, both own and cross elasticities are underestimated.     

Information Asymmetry in Consumer Perceptions of Quality‐Differentiated Food Products

Increasing consumer demand for quality‐differentiated food products has given rise to a large quantity of food product classifications related to production practices and locations. Some food product claims such as native have no clear definitions and may have ambiguous connotations for different consumers. We analyze whether asymmetry in information affects consumer preferences and willingness to pay for ambiguous claims using the native attribute. An empirical application of pecans is used in the analysis to compare native and improved pecan varieties. With no evidence in the literature of additional benefits of native varieties, the results showed that consumers preferred native varieties. Furthermore tastes and preferences for all product attributes were heterogeneous; heterogeneity in preference for the native attribute was only significant at the 10% level.     

Exploring cosmetics advertising in southern China

China is now one of the largest and fastest-growing advertisement markets in the world. This research provides insights to assist advertising executives in their bid to target cosmetics consumers in Hong Kong and Shenzhen. Despite a tendency to retain certain traditional values, we find that Chinese women in these cities have increased their status and independence, and are inspired by western brands, music and images. We discover some significant differences between these markets, which suggest that some adaptations may be required in terms of advertising appeal, model selection and media focus, when designing advertising campaigns that will influence the consumer groups in these cities.     

Controls on Advertising: an Examination of Some Economic Arguments

There is increasing pressure to regulate advertising in Britain, and economic concepts are often advanced to support such a policy. One argument is that advertising is wasteful, but this depends upon a quite arbitrary view of what kinds of product differences are considered important. A second argument is that advertising distorts consumer tastes. This claim reflects a particular psychological view (behaviourism) which is not widely accepted nowadays. Other psychological theories, reflected in the writings of modern economists, see advertising as playing a constructive role in helping to reveal tastes, with consumers playing an active rather than passive role in choice. The proposals to limit advertising thus depend upon particular value judgements or psychological theories for which economics provides no justification.     

Mitigating consumer ethnocentrism via advertising and media consumption in a transitional market

Consumer ethnocentrism is considered an important barrier to consumption in the global marketplace. Although the concept of consumer ethnocentrism has been investigated over many years in developed markets, there is little research addressing the mitigation of consumer ethnocentrism in transitional economies, which are becoming increasingly important in the global marketplace. One such market, Russia, represents a major potential investment opportunity for global marketers. In this study, we undertake an exploratory study investigating consumer ethnocentrism’s negative influence on Russians’ attitudes towards foreign products and their frequency of purchase of foreign products. We also demonstrate that the influence of consumer ethnocentrism on the frequency of purchase of foreign products is moderated by consumers’ exposure to mass communication (i.e. exposure to television, exposure to foreign movies) and by marketing communication efforts (i.e. exposure to foreign product advertising, involvement with foreign product advertising). In addition to extending theoretical research to a transitional, non-Western context, the empirical results also provide implications for international advertising practitioners.     

The effects of ad heuristic and systematic cues on consumer brand awareness and purchase intention: Investigating the bias effect of heuristic information processing

With growing numbers of digital users, social media advertising becomes a vital marketing channel for attracting and sustaining consumers. Drawing on the heuristic-systematic model, this research investigates the effects of advertisement systematic cues including ad informativeness and ad persuasiveness, and ad heuristic cue which is ad poster category on the consumer brand awareness, and the sequential effect on consumer purchase intention. An experimental design featuring two categories of ad poster, namely, firm and influencer, is created for empirical evidence collection. Results show that ad informativeness and ad persuasiveness contribute to greater consumer brand awareness and purchase intention. The poster category can positively bias the influence of ad informativeness, and firm poster outperforms the influencer poster when controlling the advertisement content the same. The findings demonstrate the co-occurrence of heuristic and systematic information processing in the social media advertising context. This research deepens current understanding of social media advertising and provides practical implications for marketers to capitalize on different ad posters according to advertisement informativeness and persuasiveness feature.     

Bringing consumer information systems down to earth. Experiences from a Swedish experiment

How is it possible to provide consumers with necessary information to make well informed choices in today's markets where there is a growing supply of complex and ever changing products and services? The information is in the main commercial. Its role is to persuade as well as to inform. Therefore, its usefulness for the consumers is questionable. To bridge this information gap policymakers have initiated programmes to provide useful information for consumers. In this context, Sweden has tried something new, by requiring by law that enterprises supply information in their advertising which is of special significance for the consumers. When this information obligation was put to practice there was unexpected resistance from business, particularly concerning added information in advertising outside the point of sale. An analysis of alternative mandatory consumer information systems (CI) indicates that the resistance and difficulties met in implementing the Swedish information duty system most probably are inherent in all CI-systems requiring business to provide full and detailed information about their products. CI is however only one of the important factors in creating well-informed consumers. The capacity of consumers to absorb and process information and consumer involvement and motivation also affect the outcome.     

Seller honesty and product line pricing

We study upselling in markets where the seller observes consumer need but the consumer herself may not (e.g., medical care, durable repairs, financial and legal services). The seller may recommend excessive product features to uninformed consumers. In a monopoly with two types of consumer (one with a basic need and the other an advanced need) and two types of service (a basic service which fulfills only the basic need and an advanced service which fulfills both needs), we investigate the firm’s honesty and product-line pricing. We reach several results. First, the firm is honest if the basic service is superior (in that it generates higher per-capita social surplus than the advanced service under the efficient allocation) or if the consumers with the basic need are sufficiently many. Second, when there exist informed consumers who neglect seller recommendation, the presence of informed consumers may cause consumer welfare to decrease, and a larger informed population may cause firm profits and social welfare to increase or decrease. Lastly, when the informed consumers boycott a dishonest firm and withhold purchase, firm profits may increase because the threat of boycotting makes the firm more credible and allows a higher price of the advanced service.     

Priming a Cross‐Category Brand Alliance: The Moderating Role of Attribute Knowledge and Need for Cognition

Firms often enter cross‐category advertising brand alliance strategies with the goal to increase their market share by association with popular but noncompeting brand allies. However, firms are often not aware of the effects of these alliances on consumer perceptions of participating brands. This research explores the factors moderating brand attribute inferences following exposure to a cross‐category advertising brand alliance. It is proposed that attributes of a brand ally may serve as anchors that produce assimilation effects and move perceptions of a target brand toward the ally's attribute value, or as standards of comparison that produce contrast. This work provides evidence that attribute judgments in a cross‐category advertising brand alliance are moderated by attribute knowledge and individual differences in information processing motivation as reflected in self‐reported need for cognition (NFC) ratings.     

Does New Information Technology Lower Media Quality? The Paradox of Commercial Public Goods

We define commercial public goods as goods that are broadcast via television, radio, newsprint, or websites for which consumption is non-rival and non-exclusive, and revenue is generated mainly through advertising alongside a product in a two-sided market. With new information technology the fixed cost of entry in these markets has substantially declined. We demonstrate that as fixed costs of entry decline in a competitive media market, lower industry concentration results in lower resources to each firm for the production of commercial public goods. The counterintuitive result of new information technology is that it may result in lower quality news reporting and a less-informed population. The result may hold even when consumers exhibit preferences for diversity in media outlets.     

The existence and perception of redundancy in consumer information environments

Two studies are reported which examine the existence of attribute redundancy as well as consumers' ability to perceive attribute redundancy in consumer information environments. The results of the first study suggest that attribute redundancy varies widely from product category to product category. The results of the second study suggest that consumers' ability to perceive attribute relationships improves with product knowledge. Unexpected was an observed U-shaped relationship between consumers' perceptions of attribute redundancy and attribute knowledge. Together the results suggest a number of policy implications regarding the value of consumer information programs.     

Consumer perceptions of third party product quality ratings

Consumers increasingly rely on product quality information provided by third-party product ratings organizations. These organizations undertake the task of examining and testing competing products in the marketplace, establishing the level of quality associated with each product, and communicating this information to consumers. Despite the important role of product quality ratings in consumer decisions little research has been conducted to establish the factors which may influence consumer perceptions of these ratings. This paper examines the role of the information content provided by product quality ratings organizations on consumer perceptions. Furthermore, the influence of contextual variables, namely information cost, product category and advertising content, is examined. The results indicate that both content and context significantly influence consumer perceptions of source credibility and their intentions to use the product quality ratings in their purchase decisions.     

The impact of advertising along the conversion funnel

We assemble a unique data set that combines information on supermarket feature advertising with path-tracking data on consumers’ movement within the store as well as purchase information. Using these novel data, we trace out how advertising affects consumer behavior along the path-to-purchase. We find advertising has no significant effect on the number of consumers visiting the category being advertised. The null effect is precisely estimated. At the upper bound of the confidence interval, a one-standard-deviation shift in advertising increases category traffic by only 1.3%. We do find a significant effect at the lower end of the conversion funnel. A one-standard-deviation change in advertising (evaluated at the point estimate) increases category-level sales by 10%. We further decompose the impact on sales and find the increase is driven by the same number of consumers buying a larger number of products of the same brand. We find no evidence of spillover effects of advertising between categories that are stocked in proximity of each other, nor between different products in the same category. Two mechanisms are consistent with these patterns: consumers retrieve memory of the ad only when interacting with the category or only consumers wanting to purchase the brand choose to consume the ad.     

The impact of COVID-19 on consumer evaluation of authentic advertising messages

This study investigates the relationship between the COVID-19 threat and consumer evaluation of a product with authenticity appeals in advertisements. We propose that threatening situations like COVID-19 motivate consumers to lower their uncertainty and increase their preference for products with authentic advertising messages. Because individuals react differently to threatening environments according to their early-life experiences, commonly reflected in childhood socioeconomic status, we examined whether childhood socioeconomic status moderates the relationship between threat and consumer evaluation of authenticity in advertisements. First, secondary data from Google Trends provided empirical support for our predictions. In additional experimental studies, participants evaluated different target products in four studies that either manipulated (Studies 2 and 3) or measured (Studies 4 and 5) COVID-19 threat. Our results provide converging evidence that consumers positively evaluate products with authentic advertising messages under the COVID-19 threat. Consumers' motivation to lower their uncertainty underlies the effect of COVID-19 threat on their evaluation of authentic messages (Study 3). This attempt to reduce uncertainty is more likely to occur for consumers with relatively higher childhood socioeconomic status (Studies 4 and 5). These findings suggest that using authenticity appeals during a pandemic could effectively reduce consumers' perceived uncertainty and generate positive consumer evaluations.     

Permission Marketing and Privacy Concerns — Why Do Customers (Not) Grant Permissions?

Little is known about the influence of motivators that drive consumers to grant permission to be contacted via personalized communication. In this study, a framework is developed to investigate the effect of select drivers of consumers granting permission to receive personalized messages. The authors distinguish between drivers related to benefit and cost to the consumers. They identify the influence of perceived personal relevance, entertainment, and consumer information control as well as monetary incentives and lottery participation as benefit-related factors. Cost-related factors entail the registration process, privacy concerns, and perceived intrusiveness. The authors find that, except for monetary incentives and lottery participation, the identified drivers significantly influence consumers' decision to grant permission. The strong negative influence of privacy concerns on the probability of granting permission can be lessened by two benefit-related factors, namely message content with entertainment value or personal relevance for the consumer. The study helps to improve firm measures aimed at getting more permissions — granted by customers for interactive campaigns.     

Quality disclosure in the presence of strategic consumers

Consider a market for short-life products, such as smartphones, where a firm and consumers have asymmetric quality information, the firm sells products in two periods, and consumers make purchase decisions strategically. We investigate when a firm should disclose quality and the interaction between consumers' strategic behavior and the firm's disclosure behavior. We obtain several findings. First, regardless of whether consumers have low or high patience, the firm should disclose quality information if product quality is high and conceal it if product quality is low. However, for products with moderate quality levels, the firm will disclose more quality information to consumers with relatively high or low patience levels than when consumer patience is moderate. Second, firms will disclose less information when consumers behave strategically than when they are myopic. Third, when concealing quality information is an equilibrium, product prices are affected only by disclosure costs and independent of true product quality. Finally, the firm can benefit from consumers' strategic behavior and a higher disclosure cost, but greater patience might be detrimental to consumer surplus and social welfare.