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.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
Tax calculation will be finalised during checkout.
Advertising Age (1995) ‘Profiling America's Biggest Ad Spenders’, Vol. 66, September 27, p. 1.
Advertising Age (1996) ‘Tough Rules Besiege Rich Smoke Segment,’, Vol. 67, September 30, p. s13.
Anderson, Simon P., André de Palma, and Jacques-Francois Thisse (1992) Discrete Choice Theory of Product Differentiation. Cambridge, MA: The MIT Press.
Bagwell, Kyle, and Garey Ramey (1988) ‘Advertising and Limit Pricing’, Rand Journal of Economics, 19, 59–71.
Bain, Joe S. (1956) Barriers to New Competition. Oxford: Basil Blackwell.
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.
Bloch, Francis, and Delphine Manceau (1999) ‘Persuasive Advertising in Hotelling's Model of Product Differentiation’, International Journal of Industrial Organization, 17, 557–574.
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.
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.
d'Aspremont, C., J. Jaskold Gabszewicz, and J.-F. Thisse (1979) ‘On Hotelling's Stability in Competition’, Econometrica, 47, 1145–1151.
Dixit, Avinash, and Victor Norman (1978) ‘Advertising and Welfare’, Bell Journal of Economics, 9, 1–17.
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.
Federal Trade Commission v. Proctor & Gamble Co., 386 U.S. 568 (1967).
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.
Golan, Amos, Larry S. Karp, and Jeffery M. Perloff (1996) ‘Estimating Firms' Mixed Price and Advertising Strategies: Coke and Pepsi’, mimeo, UC-Berkeley.
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.
Greer, Douglas F. (1992) Industrial Organization and Public Policy. New York: McMillan Publishing Co.
Grossman, Gene M., and Carl Shapiro (1984) ‘Informative Advertising with Differentiated Products’, Review of Economic Studies, 51, 63–81.
Hallagan, William, and Wayne Joerding (1983) ‘Polymorphic Equilibrium in Advertising’, Bell Journal of Economics, 14, 191–201.
Hotelling, Harold (1929) ‘Stability in Competition’, Economic Journal, 39, 41–57.
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.
Kaldor, Nicholas (1949–1950) ‘The Economics of Advertising’, Review of Economic Studies, 17, 1–21.
Klein, Benjamin, and Keith B. Leffler (1981) ‘The Role of Market Forces in Assuring Contractual Performance’, Journal of Political Economy, 89, 615–641.
Krouse, Clement G. (1984) ‘Brand Name as a Barrier to Entry: The ReaLemon Case’, Southern Economic Journal 51, 498–492.
Milgrom, Paul, and John Roberts (1986) ‘Price and Advertising Signals of Product Quality’, Journal of Political Economy, 94, 796–821.
Muris, Timothy J., David T. Scheffman, and Pablo T. Spiller (1993) Strategy, Structure, and Antitrust in the Carbonated Soft-Drink Industry. London: Quorum Books.
Mussa, Michael, and Sherwin Rosen (1978) ‘Monopoly and Product Quality’, Journal of Economic Theory, 18, 301–317.
Nelson, Philip (1974) ‘Advertising as Information’, Journal of Political Economy, 82, 729–754.
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.
Scherer, F. M., and David Ross (1990) Industrial Market Structure and Economic Performance. Boston: Houghton Mifflin Co.
Stigler, George J. (1961) ‘The Economics of Information’, Journal of Political Economy, 69, 213–225.
Sutton, John (1992) Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration. Cambridge, MA: MIT Press.
Telser, Lester (1964) ‘Advertising and Competition’, Journal of Political Economy, 72, 551–567.
Tirole, Jean (1988) The Theory of Industrial Organization. Cambridge, MA: MIT Press.
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.
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.
Tremblay, Victor J., and Stephen Polasky (2000) ‘Advertising and Brand Loyalty in Models with Subjective Product Differentiation’, mimeo, Department of Economics, Oregon State University.
Von der Fehr, Nils-Henrik M., and Kristin Stevik (1998) ‘Persuasive Advertising and Product Differentiation’, Southern Economic Journal, 65, 113–126.
Wiggins, Steven N., and David G. Raboy (1996) ‘Price Premia to Name Brands: An Empirical Analysis’, Journal of Industrial Economics, 44, 377–389.
About this article
Cite this article
Tremblay, V.J., Polasky, S. Advertising with Subjective Horizontal and Vertical Product Differentiation. Review of Industrial Organization 20, 253–265 (2002). https://doi.org/10.1023/A:1015095508749
- Horizontal differentiation
- persuasive advertising
- price competition
- vertical product differentiation