Course outline ii
1 / 20

Course outline II - PowerPoint PPT Presentation

  • Uploaded on

Course outline II. Product differentiation Advertising competition Compatibility competition. Heterogeneous goods. Advertising competition I. Advertising and price competition for established products Advertising and price competition for new products

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about 'Course outline II' - amelie

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Course outline ii
Course outline II

  • Product differentiation

  • Advertising competition

  • Compatibility competition



Advertising competition i
Advertising competition I

  • Advertising and price competition for established products

  • Advertising and price competition for new products

  • Sequential advertising competition - entry and deterrence of entry

  • Executive summary

Advertising competition ii
Advertising competition II

  • Grossman & Shapiro (1984)

  • Two firms differ with regard to two aspects:

    • Information policy,

    • Horizontal differentiation (model “Hotelling“); here

  • We consider four groups of consumers:

    • Consumers are informed about both goods,

    • Consumers are informed about good 1 only,

    • Consumers are informed about good 2 only,

    • Consumers are not informed about any good.

Brand demand with name recognition a 1 and a 2
Brand demand with name recognition A1 and A2

only good 1 is known

both products are known


demand for good 1

only good 2 is known

demand for good 2

no good is known

no demand




The demand function
The demand function

Firm 1’s demand function:


price cap!

monopolistic part of demand

price advantage

intensity of competition

demand in case of equal prices

Cost of advertising
Cost of advertising

is called the cost rate of advertising.

Exercise fixed prices simul taneous vs sequential competition
Exercise (fixed prices, simul-taneous vs. sequential competition)

Consider two insurance companies being forced to sell their policies at a fixed price of 5.

Find the equilibrium name recognitions in a simultaneous advertising competition assuming

Now assume that one company is the advertising leader.

The simultaneous game
The simultaneous game competition)

  • Firm 1’s profit function:

  • Firm 1’s “reaction functions”:

scope for raising prices due to incomplete information

Symmetric equilibrium
Symmetric equilibrium competition)


Solving the pricing game 2 nd stage
Solving the pricing game competition)(2nd stage)

  • Firms’ reaction functions

  • Bertrand-Nash equilibrium

  • Effect of name recognition on prices:

Analyzing the advertising competition 1 st stage
Analyzing the advertising competition (1 competition)st stage)

? ? >0 <0 =0





(optimal prices)

Sequential versus simultaneous game
Sequential versus simultaneous game competition)

  • In the simultaneous game, optimal advertising levels are chosen according to :

    (the direct effect - the only effect in this case - should be zero)

  • In the sequential game, we found a negative strategic effect of advertising.

  • This yields:

Exercise advertising competition
Exercise (advertising competition) competition)

Two tax consultants compete by fixing their level of advertising expenses, A1 and A2. The price of 10 for one consulting hour is given by regulation. Demand and profit functions are given by

Calculate and interpret the reaction functions. Find the equilibria! How will the consultants feel about a law prohibiting advertising?

Entry deterrence
Entry deterrence competition)

Follower’s reduced profit function:

=0, optimalprices at 3rd stage

=0, optimal advertising at 2nd stage

Executive summary
Executive summary competition)

  • Incomplete information about the products (Ai<1) increases the scope for raising prices.

  • High advertising costs may have positive effects on firm’s profits.

  • The advertising leader has the opportunity to build up a strategic entry barrier (limit adverti-sing expenditure or limit name recognition).