Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Mass versus Direct Advertising and Product Quality

Vol.29, No.3, September , 1–22



  •   ( University of Zaragoza)

  •   (University of Zaragoza)

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Abstract  

This paper analyzes how the use of mass vs. direct advertising can affect the pattern of price and quality competition in a market where two firms compete with vertically differentiated products. We show that, compared to the casewheresellersemployonlymassadvertising,theuseofdatabaseadvertising based on historical sales records improves the competitive position of the lowquality firm, which achieves a larger market share and can obtain higher profits. As a result, the high-quality firm lowers the supply of quality, which decreases thedegreeofproductdifferentiationinthemarketandtriggersstrongpricecompetition,thusdecreasingitsprofitsandincreasingconsumersurplus. Finally,we show that, although database advertising is more cost-efficient than mass advertising, the market distortion in the provision of quality implies that the use of direct advertising can yield a welfare loss.


Keywords
   database advertising, vertical differentiation

JEL classification codes
   D43; L13; M37
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