Review of Industrial Organization

, Volume 20, Issue 3, pp 253–265 | Cite as

Advertising with Subjective Horizontal and Vertical Product Differentiation

  • Victor J. Tremblay
  • Stephen Polasky


In this paper, we analyze the impact of advertising on markets wheresubjective horizontal and vertical product differentiation are important. A simple model showshow advertising can be used to create subjective horizontal and vertical differentiation.The model predicts that firms are likely to be symmetric when advertising creates subjective horizontaldifferentiation and that name and generic brands are most likely to coexist in markets whereadvertising creates subjective vertical differentiation. In all cases, the ability toadvertise creates distance between products which increases the market power of firms. Finally, severalreal world examples are used to illustrate the conditions under which the model is most relevant.

Horizontal differentiation persuasive advertising price competition vertical product differentiation 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Advertising Age (1995) ‘Profiling America's Biggest Ad Spenders’, Vol. 66, September 27, p. 1.Google Scholar
  2. Advertising Age (1996) ‘Tough Rules Besiege Rich Smoke Segment,’, Vol. 67, September 30, p. s13.Google Scholar
  3. Anderson, Simon P., André de Palma, and Jacques-Francois Thisse (1992) Discrete Choice Theory of Product Differentiation. Cambridge, MA: The MIT Press.Google Scholar
  4. Bagwell, Kyle, and Garey Ramey (1988) ‘Advertising and Limit Pricing’, Rand Journal of Economics, 19, 59–71.Google Scholar
  5. Bain, Joe S. (1956) Barriers to New Competition. Oxford: Basil Blackwell.Google Scholar
  6. Becker, Gary S., and Kevin M. Murphy (1993) ‘A Simple Theory of Advertising as a Good or Bad’, Quarterly Journal of Economics, 104, 941–964.Google Scholar
  7. Bloch, Francis, and Delphine Manceau (1999) ‘Persuasive Advertising in Hotelling's Model of Product Differentiation’, International Journal of Industrial Organization, 17, 557–574.Google Scholar
  8. Caves, Richard E., and David P. Greene (1996) ‘Brands' Quality Levels, Prices, and Advertising Outlays: Empirical Evidence on Signals and Information Costs’, International Journal of Industrial Organization, 14, 29–52.Google Scholar
  9. Caves, Richard E., and Michael Porter (1977) ‘From Entry Barriers toMobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition’, Quarterly Journal of Economics, 91, 241–261.Google Scholar
  10. d'Aspremont, C., J. Jaskold Gabszewicz, and J.-F. Thisse (1979) ‘On Hotelling's Stability in Competition’, Econometrica, 47, 1145–1151.Google Scholar
  11. Dixit, Avinash, and Victor Norman (1978) ‘Advertising and Welfare’, Bell Journal of Economics, 9, 1–17.Google Scholar
  12. Farr, Stephen, Carol Horton Tremblay, and Victor J. Tremblay (2001) ‘The Welfare Effect of Advertising Restrictions in the U.S. Cigarette Industry’, Review of Industrial Organization, 18, 147–160.Google Scholar
  13. Federal Trade Commission v. Proctor & Gamble Co., 386 U.S. 568 (1967).Google Scholar
  14. Gasmi, F., J. J. Laffont, and Q. Vuong (1992) ‘Econometric Analysis of Collusive Behavior in a Soft-Drink Market’, Journal of Economics & Management Strategy, 1, 277–311.Google Scholar
  15. Golan, Amos, Larry S. Karp, and Jeffery M. Perloff (1996) ‘Estimating Firms' Mixed Price and Advertising Strategies: Coke and Pepsi’, mimeo, UC-Berkeley.Google Scholar
  16. Grabowski, Henry G., and John M. Vernon (1992) ‘Brand Loyalty, Entry, and Price Competition in Pharmaceutical after the 1984 Drug Act’, Journal of Law and Economics, 35, 331–350.Google Scholar
  17. Greer, Douglas F. (1992) Industrial Organization and Public Policy. New York: McMillan Publishing Co.Google Scholar
  18. Grossman, Gene M., and Carl Shapiro (1984) ‘Informative Advertising with Differentiated Products’, Review of Economic Studies, 51, 63–81.Google Scholar
  19. Hallagan, William, and Wayne Joerding (1983) ‘Polymorphic Equilibrium in Advertising’, Bell Journal of Economics, 14, 191–201.Google Scholar
  20. Hotelling, Harold (1929) ‘Stability in Competition’, Economic Journal, 39, 41–57.Google Scholar
  21. Kadiyali, Vrinda (1996) ‘Entry, its Deterrence, and its Accommodation: A Study of the A Study of the U.S. Photographic Film Industry’, Rand Journal of Economics, 27, pp. 452–478.Google Scholar
  22. Kaldor, Nicholas (1949–1950) ‘The Economics of Advertising’, Review of Economic Studies, 17, 1–21.Google Scholar
  23. Klein, Benjamin, and Keith B. Leffler (1981) ‘The Role of Market Forces in Assuring Contractual Performance’, Journal of Political Economy, 89, 615–641.Google Scholar
  24. Krouse, Clement G. (1984) ‘Brand Name as a Barrier to Entry: The ReaLemon Case’, Southern Economic Journal 51, 498–492.Google Scholar
  25. Milgrom, Paul, and John Roberts (1986) ‘Price and Advertising Signals of Product Quality’, Journal of Political Economy, 94, 796–821.Google Scholar
  26. Muris, Timothy J., David T. Scheffman, and Pablo T. Spiller (1993) Strategy, Structure, and Antitrust in the Carbonated Soft-Drink Industry. London: Quorum Books.Google Scholar
  27. Mussa, Michael, and Sherwin Rosen (1978) ‘Monopoly and Product Quality’, Journal of Economic Theory, 18, 301–317.Google Scholar
  28. Nelson, Philip (1974) ‘Advertising as Information’, Journal of Political Economy, 82, 729–754.Google Scholar
  29. Neven, D., and J. F. Thisse (1991) ‘Brand Loyalty and Advertising: A Note’, in Jacques Thepot and Raymond-Alain Thietart, eds., Microeconomic Contributions to Strategic Management. New York: North-Holland, pp. 23–32.Google Scholar
  30. Scherer, F. M., and David Ross (1990) Industrial Market Structure and Economic Performance. Boston: Houghton Mifflin Co.Google Scholar
  31. Stigler, George J. (1961) ‘The Economics of Information’, Journal of Political Economy, 69, 213–225.Google Scholar
  32. Sutton, John (1992) Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration. Cambridge, MA: MIT Press.Google Scholar
  33. Telser, Lester (1964) ‘Advertising and Competition’, Journal of Political Economy, 72, 551–567.Google Scholar
  34. Tirole, Jean (1988) The Theory of Industrial Organization. Cambridge, MA: MIT Press.Google Scholar
  35. Tremblay, Carol Horton, and Victor J. Tremblay (1995) ‘Advertising, Price, and Welfare: Evidence from the U.S. Brewing Industry’, Southern Economic Journal, 62, 367–381.Google Scholar
  36. Tremblay, Victor J., and Carlos Martins-Filho (forthcoming) ‘A Model of Vertical Differentiation, Brand Loyalty, and Persuasive Advertising’, in Michael Baye and Jon Nelson, eds., Advances in Applied Microeconomics: Advertising and Differentiated Products, Vol. 10. JAI Press.Google Scholar
  37. Tremblay, Victor J., and Stephen Polasky (2000) ‘Advertising and Brand Loyalty in Models with Subjective Product Differentiation’, mimeo, Department of Economics, Oregon State University.Google Scholar
  38. Von der Fehr, Nils-Henrik M., and Kristin Stevik (1998) ‘Persuasive Advertising and Product Differentiation’, Southern Economic Journal, 65, 113–126.Google Scholar
  39. Wiggins, Steven N., and David G. Raboy (1996) ‘Price Premia to Name Brands: An Empirical Analysis’, Journal of Industrial Economics, 44, 377–389.Google Scholar

Copyright information

© Kluwer Academic Publishers 2002

Authors and Affiliations

  • Victor J. Tremblay
    • 1
  • Stephen Polasky
    • 2
  1. 1.Department of EconomicsOregon State UniversityCorvallisU.S.A.
  2. 2.Department of Applied EconomicsUniversity of MinnesotaSt. PaulU.S.A.

Personalised recommendations