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COORDINATION IN MARKETS WITH CONSUMPTION EXTERNALITIES: ADVERTISING AND PRODUCT QUALITY
Author(s) -
PASTINE IVAN,
PASTINE TUVANA
Publication year - 2011
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2010.02186.x
Subject(s) - consumption (sociology) , externality , incentive , product (mathematics) , quality (philosophy) , economics , competition (biology) , advertising , microeconomics , product differentiation , network effect , business , ecology , social science , philosophy , geometry , mathematics , epistemology , sociology , cournot competition , biology
In this paper we study advertising in markets with positive consumption externalities. In such markets, we show that firms may engage in advertising competition to coordinate consumer expectations on their own brand as long as they produce goods of similar quality. The firm with the lower‐quality product has a greater incentive to advertise. Hence in equilibrium, the lower‐quality product will often be more popular.