A Model of Advertising and Product Quality

Abstract

This essay presents a model of a single market in which goods of different qualities are sold and sellers advertise. Sellers advertise noncooperatively, knowing rivals' outlays and buyers' behavior patterns. Buyers react plausibly but not optimally to experience gained by purchasing and to sellers' advertising. Various properties of equilibria are analyzed. For some parameter values, the lowest-quality brands have the largest equilibrium market shares, advertising budgets, and profits. This is especially likely if buyers' behavior indicates confidence that better brands spend more on advertising.

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