Negative Advertising and Product Design

Negative advertising provides information about the weaknesses of a competitor’s product. We study negative advertising with a focus on how it impacts product positioning for profit-maximizing firms. We build a model of informative advertising competition, where product positioning is endogenous and consumers have rational expectations. We show that despite the informational benefits of negative advertising, permitting it (as the Federal Trade Commission in the United States does) may lead to reduced product differentiation and lower consumer welfare, even in markets where firms do not utilize negative advertising in equilibrium. We then extend our model to political competition, where a candidate’s objective is to obtain a larger share of votes than the competitor. We show that political competition supports higher positional differentiation, along with more negative advertising than product competition, in line with observed high use of negative advertising in political races and their rarer use in product competition