Persuasive Advertising and Product Design

Abstract

Firms design quality-price pairs to satisfy heterogeneous consumers. Apart from the core product attributes consumers gain utility through other marketing mix variables such as advertising that is affective and evokes positive feelings. An interesting question is whether a firm should use such persuasive advertising on all products or use it exclusively on a subset of products. Moreover how would such a choice affect the product design and pricing decisions? To explore this, we consider a market consisting of consumer segments with different marginal valuation for quality and persuasive advertising affects consumers' preference leading to a greater willingness to pay. We first derive a monopolist's optimal choice of quality-advertising-price and find that the monopolist prefers to use persuasive advertising for all qualities offered. We then examine the equilibrium outcome in a duopolist with the coexistence of intra-brand cannibalization and inter-firm competition. We find that multi-product firms tend to target persuasive advertising only for the high end product under moderate competitive intensity. Furthermore we show that persuasive advertising is a desirable marketing tool even when firms are differentiated on their quality choices. The robustness of qualitative results is further supported by incorporating additional consumer heterogeneity in advertising receptiveness and brand sensitivity.