Attribute-Based Persuasive Advertising and Price Competition

Abstract

This paper studies a novel model of persuasive advertising over differentiated products in a duopoly. Each firm tries to increase the weight that the consumers attach to the dominant attribute of its product in which it has an advantage and consequently shift the attention of consumers from rival's product to its own product. Persuasion is the outcome of a communication between the firms and the consumers, where the subjective weight vector is changed accordingly. We show that if the consumers are naive or the advertising technology is effective, there is a Perfect Equilibrium, where firms earn a higher profit than by not advertising because they can further differentiate their products. We also show that duopolists regard their product as strategic substitutes or complements depending on their current market share.