A Generalized Model of Advertised Sales

To better understand temporary price reductions or “sales,” this paper presents a generalized “clearinghouse” framework of advertised sales and explores some applications. By viewing the firms as competing in utility and amending the conventional tiebreak rule, we allow for multiple dimensions of firm heterogeneity in complex market environments. Moreover, we (i) provide original insights into the number and types of firms that use sales, (ii) offer new results on how firm heterogeneity affects market outcomes, (iii) extend a common empirical “cleaning” procedure, and (iv) analyze a family of activities in sales markets, including persuasive advertising and obfuscation. (JEL D21, D43, L13, L25, M37)

Persuasive Advertising in a Vertically Differentiated Competitive Marketplace

Despite the widely acknowledged existence in practice, the theoretical literature on persuasive advertising is generally vague about exactly how such advertising could affect consumer preferences, except for the general assumption that persuasive advertising affects consumer willingness to pay or simply “shifts demand.” This paper proposes a theoretical framework for characterizing different ways that persuasive advertising may affect consumer utility in a vertically differentiated marketplace. Firstly, persuasive advertising could simply raise consumers’ reservation price for the product category. Secondly, persuasive advertising could enhance consumers’ perception about the product quality offered by the advertising firm. Thirdly, persuasive advertising could increase consumers’ willingness to pay for quality increment. Preliminary evidences from lab studies are presented to support the existences of the proposed effects. Using a game-theoretic approach, we study two firms’ decision in the adoption of persuasive advertising of a particular effect and the associated price competition. Findings from the theoretical model analyses indicate that factors influencing a firm’s decision in persuasive advertising include consumer heterogeneity, degree of product differentiation, the effectiveness and the cost of such advertising. In a vertically differentiated competitive marketplace, persuasive adverting is a more desirable strategic tool for firms of higher-quality products to further establish a competitive advantage.