Observers argue that evidence for the persuasive role of advertising comes from competitive categories where increases in advertising lead to higher average prices. Conversely, others claim that advertising serves a purely informational role. Here, higher levels of advertising lead to better-informed consumers and this should increase competition and stimulate lower prices. The objective of this study is to neither confirm nor refute either of these perspectives of advertising. It is rather to show that increases in informative advertising alone can lead to both higher or lower prices. I further show that the direction of this relationship depends entirely on the level of differentiation between competing firms. This is done by extending the analysis of Grossman and Shapiro (1984) to conditions where the differences between competing products are more significant. The role of informative advertising is to inform consumers about individual products and higher advertising for a product means that more of the potential market knows about it. As the fraction of consumers informed about available products increases, the focal point of competition between firms changes. Changes in this focal point of competition is the basis for explaining why informative advertising can either push prices up or down in a uniformly distributed spatial market.
Consumers often resort to third-party information such as word of mouth, testimonials and reviews to learn more about the quality of a new product. However, it may be difficult for consumers to assess the precision of such information. We use a monopoly setting to investigate how the precision of third-party information and consumers' ability to recognize precision impact firm profits. Conventional wisdom suggests that when a firm is high quality, it should prefer a market where consumers are better at recognizing precise signals. Yet in a broad range of conditions, we show that when the firm is high quality, it is more profitable to sell to consumers who do not recognize precise signals. Given the ability of consumers to assess precision, we show a low quality firm always suffers from more precise information. However, a high quality firm can also suffer from more precise information. The precision range in which a high quality firm gains or suffers from better information depends on how skilled consumers are at recognizing precision.
In certain categories, an important element of competition is the use of previews to signal information to potential consumers about product attributes. For example, the front page of a newspaper provides a preview to potential newspaper buyers before they purchase the product. In this context, a news provider can provide previews that are highly informative about the content of the news product. Conversely, a news provider can utilize a preview that is relatively uninformative. We examine the incentives that firms have to adopt different preview strategies in a context where they do not have complete control of product positioning. Our analysis shows that preview strategy can be a useful source of differentiation. However, when a firm adopts a strategy of providing informative previews, it confers a positive externality on a competitor that utilizes uninformative previews. This reinforces the incentive of the competitor to use uninformative previews and explains why the market landscape in news provision is often characterized by asymmetric competition.
Understanding the patterns of demand evolution for a new category is important for firms to effectively manage capacity planning, market and service operations, and research and development. Our objective is to analyze how marketing at the industry level affects the evolution of primary demand in different stages of the product life cycle. We characterize the aggregate marketing activities in two constructs: marketing breadth and competitive spread. The first construct reflects the spread of spending across different marketing instruments at the industry level, and the second construct reflects the spread of spending across different firms. Though both constructs are related to the spread of spending within a category, we find that they have qualitatively different effects on category growth. An econometric model making use of the hierarchical nature of time observations within countries is estimated for each category. First, we find that high degrees of spending breadth impede market growth when the number of competitors is small (the category is young) but accelerate market growth when the number of competitors is higher (the category is maturing). Second, we find that high levels of competitive spread decrease category growth when spending levels are relatively low. However, as spending levels increase, the negative effect of competitive spread on demand growth all but evaporates.
Building on the observation that competitive dynamics and market evolution are inextricably linked and underresearched, we propose a road map to guide and stimulate future research in the area. A number of rationales have been proposed to explain why there is relatively little research directed toward understanding the links between competitive dynamics and market evolution; these include the predominance of different research paradigms in each area, a lack of data appropriate for analyzing the two areas together, and the difficulty of obtaining robust and significant results with analysis that is by definition complex (it must consider factors and outcomes both across firms and over time). Using this last rationale as a starting point, we develop a series of research propositions related to key relationships where (a) insignificant or contradictory results have been obtained (in extant research) or (b) researchers have yet to delve. The propositions are designed to deepen our understanding of the relationship between the areas. Throughout the analysis, the key to developing the propositions is to recognize the importance of moderating factors, mediating factors, and covariates. In addition, where the approach to empirically test a proposition is new, we propose categories, measures, and comparisons that can be used.
Many business schools are heavily dependent on revenues from executive education: they are feeling the impact of the current economic turmoil. Schools such as Wharton, INSEAD and Kellogg to name a few, have seen registrations for open enrolment programs plummet and their business for in-company programs shrink as clients cancel, postpone, reduce and in some cases bring management training in-house. Certainly, business schools can react to this challenge by reallocating resources to degree-based programmes (like the MBA) for which demand increases in a recession. Nevertheless, a fundamental question for business schools is “How can one make executive education less cyclical and vulnerable to cuts in a downturn?” The following article presents a series of strategies that business schools can adopt to stabilize executive education and make it less vulnerable to the substantial reductions in discretionary spending that occur in a recession.
