Increasing Dominance - the Role of Advertising,Pricing and Product Design

Despite the empirical relevance of advertising strategies in concentrated markets,the economics literature is largely silent on the effect of persuasive advertisingstrategies on pricing, market structure and increasing (or decreasing) dominance.In a simple model of persuasive advertising and pricing with differentiated goods,we analyze the interdependencies between ex-ante asymmetries in consumer appeal,advertising and prices. Products with larger initial appeal to consumers willbe advertised more heavily but priced at a higher level - that is, advertising andprice discounts are strategic substitutes for products with asymmetric initial appeal.We find that the escalating effect of advertising dominates the moderatingeffect of pricing so that post-competition market shares are more asymmetric thanpre-competition differences in consumer appeal. We further find that collusive advertising(but competitive pricing) generates the same market outcomes, and thatnetwork effects lead to even more extreme market outcomes, both directly and viathe effect on advertising....