Advertising in Markets with Consumption Externalities

This paper extends the entry deterrence literature by examining coordinating advertising in markets with consumption externalities using a stochastic success function. Optimal advertising and pricing strategies are analysed when an incumbent firm faces a challenger with a product of equal quality. I show that strategic entry deterrence using advertising is possible and optimal entry deterrence involves strategic pre-commitment to over-investment relative to the non-strategic simultaneous advertising benchmark. I show that when entry deterrence is not possible the incumbent does not possess a first mover advantage and optimal entry accommodation involves strategic investment in advertising followed by aggressive price competition congruent with the non-strategic simultaneous advertising benchmark. The findings suggest that an incumbent’s ability to deter entry through coordinating advertising in a market with products of equal quality is sensitive to the size of the fixed cost of entry that the challenger must incur and the consumption externality parameter.

Name dc:type.qualificationname

phd

Level dc:type.qualificationlevel

doctoral

Grantor dc:publisher.institution

National University of Ireland Maynooth

Year dc:date.issued

2014

Author dc:creator

• Whelan, Adele

• Economics, Finance & Accounting

Language dc:language

en