Advertising and Coordination in Markets with Consumption Scale Effects

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.     

A European perspective on public debt

Public debt in Europe has risen continuously over the last two decades. How is the transition to European Economic and Monetary Union, with the increasing economic interdependence between individual member states which it involves, likely to affect this situation? Which policy issues are of particular relevance in this setting?     

A model of advertising format competition: on the use of celebrities in ads

We develop a model that endogenizes both advertising format – ads with or without celebrity endorsements – and the endorsement fee. Marketing studies suggest that celebrities enhance brand recall and perception of product value. In our model, ads featuring celebrities occur when the product market is large – endorsements are likely for products sold nationally – and when products are sufficiently similar that the persuasive character of advertising looms large in demand – running shoes, beauty products, soft drinks, for example. Celebrity endorsement fees are increasing in market size and in the degree of similarity of the products being advertised.     

Location models as models of product choice

Markets in which firm choice of product is an economic decision are commonly analyzed using a variant of the location model pioneered by Hotelling (Econ. J.39 (1929), 41–57). This paper develops a framework for formalizing the idea that a set of consumers with preferences defined over an abstract set of commodities can be represented as if they behaved as is typically assumed in the goods-as-locations models. With this framework in place, we are able to derive the preference assumptions underlying the two most common versions of these models, and also to uncover the foundations of the now well-known principle of minimum differentiation.     

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.     

Issue Linking in Trade Negotiations: Ricardo Revisited or No Pain No Gain*

There has been much discussion about what issues should be included in international “trade” negotiations. Different countries, firms, and activist groups have quite different views regarding which items should (or should not) be negotiated together. Proposals run the gamut from no linking to linking trade with investment, the environment, labor, and human rights codes. This paper provides a formal framework for analyzing this question. It employs a two‐country, two‐issue bargaining model and contrasts outcomes when issues are negotiated separately and when they are linked in some form. A key concept is “comparative interest,” analogous to Ricardian comparative advantage. We provide general results and note, in particular, where a country can benefit by agreeing to include an agenda item for which, when viewed by itself, the country does not receive a positive payoff. We also provide an application of our analysis to negotiations on trade liberalization and environmental protection.     

Advertising Spending and Quality for Services: The Role of Capacity

In this paper we explore the relations among advertising spending, capacity and quality for services. Data from a sample of New York City restaurants show that mid-quality restaurants spend more on advertising than either high quality or low quality ones, contradicting the usual Nelson-type prediction that advertising spending increases with quality. Also, controlling for quality, restaurants with larger capacities advertise more. We present a model of services to explain these observations. The key features of the model are: (1) capacity constraints, (2) uncertain demand, (3) the presence of both informed and uninformed consumers, and (4) a technological link between capacity and quality. We argue that for services, advertising not only informs consumers, but it also can improve capacity utilization. Given this dual role, advertising is more valuable to firms with larger capacities and higher price-cost margins. The variation of these two elements with quality determines the advertising-quality relation.     

Physical capital,knowledge capital,and the choice between FDI and outsourcing

Abstract There exist two approaches in the literature concerning the multinational firm’s mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm transfers primarily knowledge‐based assets and assumes that knowledge is non‐excludable. A more recent approach takes the property‐right view of the firm and assumes that physical capital is fully excludable. This paper combines both forms of capital assets in a single model. There are subtleties, and added structure is needed to establish what ex ante seems a straightforward testable hypothesis: relatively physical‐capital‐intensive firms choose outsourcing while relatively knowledge‐capital‐intensive firms choose FDI.     

Signaling via an agenda in multi-issue bargaining with incomplete information

Summary. While actual bargaining features many issues and decision making on the order in which issues are negotiated and resolved, the typical models of bargaining do not. Instead, they have either a single issue or many issues resolved in some fixed order, typically simultaneously. This paper shows that, when there is incomplete information, such an approach removes an important avenue for information transmission: the bargaining agenda itself. Compared to the standard model, pooling on offers by the informed is reduced and a signaling equilibrium arises when the agenda is determined endogenously. Signaling is carried out by use of an issue-by-issue bargaining agenda. Received: September 3, 1997; revised version: May 11, 1998