Informative Advertisement of Partial Compatible Products

Roig, Guillem (2014) Informative Advertisement of Partial Compatible Products. TSE Working Paper, n. 14-483

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Official URL: http://tse-fr.eu/pub/28044

Abstract

Product design and advertisement strategy have been theoretically studied as separate firms decisions. In the present paper, we look at the link between advertisement and product design and we analyze how firms' advertising decisions influence the market effect of product design. We consider a model of informative advertisement where two firms produce a bundle of complementary products which are partially compatible. A product design with more compatible components is associated with a larger intensity of advertisement. Higher compatibility reduces competition between firms, which incentivizes them to give factual information about their bundle. Like Matutes and Regibeau (1988), industry profit and total welfare is maximized with full product compatibility. However, contrary to them, we obtain that consumer surplus is not monotone with the level of product compatibility and its maximum is attained with partial compatibility. Moreover, because consumer surplus not only depends on the equilibrium prices but also on the intensity of advertisement, we find that for intermediate equilibrium levels of advertising, consumers prefer fully compatible components rather than full incompatibility. As a result, a more compatible product design benefits all the agents in the economy.

Item Type: Monograph (Working Paper)
Language: English
Date: 26 March 2014
Uncontrolled Keywords: Informative advertisement, product design, partial compatibility, welfare
JEL codes: D21 - Firm Behavior
D43 - Oligopoly and Other Forms of Market Imperfection
L13 - Oligopoly and Other Imperfect Markets
L15 - Information and Product Quality; Standardization and Compatibility
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:43
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:28044
URI: http://publications.ut-capitole.fr/id/eprint/15876

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