Discussion paper

DP2867 Consumption Externalities, Coordination and Advertising

The aim of this Paper is to demonstrate that advertising can have an important function in markets
with consumption externalities, apart from its persuasive and informative roles. We show that
advertising may function as a device to coordinate consumer expectations of the purchasing
decisions of other consumers in markets with consumption externalities. The implications of
advertising as a coordinating device are examined in the pricing and advertising decisions of firms
interacting strategically. While, at times, the one period advertising expense can exceed the one
period monopoly profit, in equilibrium consumers will pay a premium for the more heavily
advertised brand.

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Citation

Pastine, T and I Pastine (2001), ‘DP2867 Consumption Externalities, Coordination and Advertising‘, CEPR Discussion Paper No. 2867. CEPR Press, Paris & London. https://cepr.org/publications/dp2867