Weinem, Michael and Heil, Oliver (2010): Pre-entry advertising, entry deterrence and multi-informational signaling.
Download (312kB) | Preview
Advertising is commonly regarded as a strategic tool to increase demand and steal business from competitors. The present work studies the competitive effects of advertising in a two-period game with incomplete information about the opponent's cost structure. Bagwell and Ramey (1988) showed that deterring entry is possible by signaling lower costs even if the post-entry game is independent of the pre-entry advertising decision. Assuming that pre-entry advertising by an entrant affects the post-entry game, then the incumbent is forced to do more than in the Bagwell/Ramey case to deter entry; he needs to distort costs downwards more extensively. On the other hand, introductory advertising does not facilitate entry if the entrant learns from the signal that competition with the incumbent is unprofitable. In this case, the entrant abstains from entry after performing introductory advertisng. Furthermore, if the incumbent has private information on cost and advertising effectiveness, then he can deter entry by acting as if he had lower production costs and a better advertising effectiveness. In this scenario, entry deterrence is associated with overinvestment in advertising but not with limit pricing, which is a new prediction. The use of multi-informational signals, i.e. pooled information on more than one type of private information transferred by one signal, is methodologically a new development of the classical signaling game.
|Item Type:||MPRA Paper|
|Original Title:||Pre-entry advertising, entry deterrence and multi-informational signaling|
|Keywords:||advertising, entry deterrence, advertising effectiveness, pre-entry advertising, signaling|
|Subjects:||M - Business Administration and Business Economics; Marketing; Accounting > M3 - Marketing and Advertising > M37 - Advertising
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L12 - Monopoly; Monopolization Strategies
D - Microeconomics > D4 - Market Structure and Pricing > D42 - Monopoly
C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games
|Depositing User:||Michael Weinem|
|Date Deposited:||25. Nov 2011 13:03|
|Last Modified:||16. Feb 2013 06:56|
Alemson MA (1970): Advertising and the Nature of Competition in Oligopoly over Time: A Case Study. Economic Journal, 80 (318), 282-306.
Bain JS (1949): A Note on Pricing Monopoly and Oligopoly. American Economic Review, 39 (2), 448-64.
Bagwell K, Ramey G (1988): Advertising and Limit Pricing. Rand Journal of Economics, 19 (1), 59-71.
Brown RS (1978): Estimating Advantages to Large-Scale Advertising. Review of Economics and Statistics, 60 (August), 428-37.
Chen Y (1997): Multidimensional Signalling and Diversification. Rand Journal of Economics, 28 (1), 168-87.
Cho IK, Kreps DM (1987): Signaling Games and Stable Equilibria}. Quarterly Journal of Economics, 102 (2), 179-222.
Clark R, Doraszalski U, Draganska M (2007): Information or Persuasion? An Empirical Investigation of the Effect of Advertising on Brand Awareness and Perceived Quality using Panel Data. Stanford University, Graduate School of Business, Research Paper No. 1971.
Cubbin JS, Domberger S (1988): Advertising and Post-Entry Oligopoly Behaviour. Journal of Industrial Economics, 37 (2), 123-40.
Dorfman R, Steiner P (1954): Optimal Advertising and Optimal Quality. American Economic Review, 44, 826-836.
Ferguson JM (1967): Advertising and Liquor. Journal of Business, 40 (October), 414-34.
Hertzendorf MN (1993): I'm Not a High-Quality Firm But I Play One on TV. Rand Journal of Economics, 24 (2), 236-47.
McNally WJ (1999): Multi-Dimensional Signaling with Fixed-Price Repurchase Offers. Managerial and Decision Economics, 20, 131-50.
Milgrom P, Roberts J (1986): Price and Advertising Signals of Product Quality. Journal of Political Economy, 94 (4), 796-821.
Moorthy S, Zhao H (2000): Advertising Spending and Perceived Quality. Marketing Letters, 11 (3), 221-33.
Needham D (1974): Entry Barriers and Non-Price Aspects of Firm's Behavior. Journal of Industrial Economics, 25, 29-43.
Quinzii D, Rochet JC (1985): Multidimensional Signalling. Journal of Mathematical Economics, 14 , 261-84.
Schmalensee R (1974): Brand Loyalty and Barriers to Entry. Southern Economic Journal, 40 (4), 579-88.
Schmalensee R (1983): Advertising and Entry Deterrence: An Exploratory Model. Journal of Political Economy, 91 (4), 636-53.
Spence M (1973): Job market signalling. Quarterly Journal of Economics, 87 (3), 355-74.
Telser LG (1962): Advertising and Cigarettes. Journal of Political Economy. 70 (5), 471-99.
Thomas LA (1999): Incumbent Firm's Response to Entry: Price, Advertising and New Product Introduction. International Journal of Industrial Organization. 17, 527-55.
Wilson R (1985): Multi-Dimensional Signalling. Economics Letters. 19, 17-21.