Price Advertising Research Articles

Brand and Price Advertising in Online Markets

We model a homogeneous product environment where identical e-retailers endogenously engage in both brand advertising (to create loyal customers)and price advertising (to attract shoppers). Our analysis allows for cross-channel effects; indeed, we show that price advertising is a substitute for brand advertising. In contrast to models where loyalty is exogenous, these cross-channel effects lead to a continuum of symmetric equilibria; however, the set of equilibria converges to a unique equilibrium as the number of potential e-retailers grows arbitrarily large. Price dispersion is a key feature of all of these equilibria, including the limit equilibrium. While each firm finds it optimal to advertise its brand in an attempt to grow its base of loyal customers, in equilibrium, branding (1) reduces firm profits, (2) increases prices paid by loyals and shoppers, and (3) adversely affects gatekeepers operating price comparison sites. Branding also tightens the range of prices and reduces the value of the price information provided by a comparison site. Using data from a price comparison site, we test several predictions of the model.

The Market for Contingent Fee-Financed Tort Litigation: Is It Price Competitive?

Tort liability has undergone an enormous expansion in the past 40 years. So too has the effective hourly rate obtained by plaintiff lawyers which has increased well over 1000% in that time frame (adjusted for inflation). That the enormous increases in effective hourly rates parallel the enormous expansion in tort liability raises a number of issues. In this article, I examine one of them: whether the market for contingent fee-financing of tort litigation is price competitive. To do so, I examine certain indicia of a noncompetitive market including the fact of uniform pricing, the absence of economic justification for uniform pricing such as reductions in agency costs or transactional costs, inelasticity of the price in light of highly variable production costs and the absence of price advertising. I then examine factors which inhibit the emergence of a price competitive market including asymmetrical knowledge, the utility of uniform pricing in misleading consumers as to risk, and the signaling function of uniform pricing. I then examine the reasons for the persistence of uniform pricing in the face of the predictions of economists applying standard economic theory that some lawyers would undercut standard pricing thereby generating competitive behavior that would more closely align pricing with risk and the variable cost of producing the service. I attribute the persistence of uniform pricing to market failures and analyze the reasons for such failures. Finally, I examine the actions of the bar designed to prevent a competitive market from emerging. These actions include the maintenance of barriers to entry into the tort claiming market, prohibitions against the outright purchase of tort claims and adoption of rules of ethics effectively prohibiting price competition including prohibitions against providing financial assistance to clients and brokerage of lawyers' services for profit.

Audience characteristics and the price of advertising in a circulation industry: evidence from US magazines

This paper investigates the impact of audience characteristics on the newsstand sales, the cover price and the price of advertising in the US magazine industry. Employing a unique data set describing 94 US magazines, a simultaneous equations model estimates the impact of various audience and magazine characteristics on the price of magazine advertising. The empirical model is guided by previous theoretical work that predicts audience characteristics may influence the price of advertising. The results indicate that average reader income, average reader age, the number of pages printed per year, and the possible number of advertising impressions enhance the price of advertising. On the other hand, a higher cover price, having local distribution, and a greater dependence on newsstand sales reduce the price publishers charge for advertising.

Cultural Superstitions and the Price Endings Used in Chinese Advertising

In traditional Chinese superstition, the numerical digit 8 is associated with prosperity and good luck and the digit 4 is associated with death. An examination of the price endings used in a sample of Chinese price advertisements indicates a distinct tendency to favor the digit 8 and to avoid the digit 4. These results constitute evidence of the role of superstition in the Chinese marketplace and provide guidance for setting prices in this increasingly important market.

Price Transparency

Although enhanced price transparency will generally increase competition to the benefit of consumers, this paper argues that it can have the opposite effect in some special situations. A negative impact is especially likely in markets already prone to anti-competitive coordination. In such markets, competition authorities should be suspicious of competitors exchanging price data, or engaging in any other practice that could help focus anti-competitive arrangements or help competitors more than customers to react to price changes. They should also be wary of exchanges of non-binding future prices. The paper identifies a number of key factors to consider in assessing whether increased price transparency might raise the probability of anticompetitive co-ordination. That includes having a look at meeting competition and most favored nation clauses, and the practice of base point pricing. The paper also examines price transparency as regards information exchanges within trade associations, price advertisements, and mandatory price transparency in public procurement markets. It closes with a short list of questions competition authorities might wish to keep in mind when investigating the effects of price transparency. This OECD Competition Roundtable was held in June 2001.

Strategic Targeted Advertising

textabstractWe present a strategic game of pricing and targeted-advertising. Firms can simultaneously target price advertisements to different groups of customers, or to the entire market. Pure strategy equilibria do not exist and thus market segmentation cannot occur surely. Equilibria exhibit random advertising --to induce an unequal distribution of information in the market-- and random pricing --to obtain profits from badly informed buyers--. We characterize a positive profits equilibrium where firms advertise low prices to a segment of consumers, high prices to a distinct segment of consumers, and intermediate prices to the entire market. As a result the market is segmented only from time to time and presents substantial price dispersion across segments.

Using invoice price information to frame advertised offers

The present studies consider the presence and absence of invoice price (IP) information (i.e., the cost to the seller) and the inclusion of offer fairness (OF). In addition, the relative effectiveness of invoice vs. manufacturer's suggested retail price (MSRP) frames is considered. Briefly, the results of our studies provide supportive evidence of the positive framing effects of invoice or cost information in retail price advertising. Specifically, higher promoted invoice prices increased transaction value (TV), acquisition value (AV), and perceived OF. Counter to our predictions, perceptions of quality were not directly affected by either sale price or invoice amount. Further evidence of the positive effects of invoice information was provided by the negative relationship between sale price and OF being moderated by the provision of the higher invoice amount and by the larger effect sizes associated with invoice differential prices than comparable MSRP claim differences.

Comparative Price Advertising: Believe It or Not

Advertisers' attempts to enhance consumers' perceptions of the of a deal by using comparative price advertisements, in which they implicitly or explicitly compare the selling price to some suggested reference price, is widespread. Rare is the price advertisement that only proclaims the selling or price. Although the additional information contained in an advertised reference price may be useful to consumers, a crucial issue concerns the deceptive power of comparative price advertising that provides inflated and exaggerated reference prices. Under these circumstances, it is possible for consumers to develop perceptions of the deal that are not based on actual savings. Such issues have been the focus of a number of lawsuits and have spurred research on what constitutes deception (see Grewal, Grewal, and Compeau 1993 for a description of relevant FTC guidelines and summary of major legal cases against popular retailers). In a comprehensive review of the literature, Grewal and Compeau (1999) examine critical public policy issues associated with pricing strategies. The authors stress that although many substantive conclusions can be drawn from the extant research, several gaps still exist. They also provide a conceptual framework to understand key issues, and emphasize the need for additional research to investigate whether firms can (intentionally or unintentionally) mislead consumers. This research focuses on one gap, the effects of the advertised reference price and the selling price on consumers' believability of the advertised reference price as well as their perceptions of the of the deal. BACKGROUND Researchers have spent over two decades assessing the effectiveness of comparative price advertisements. The primary substantive issue centers on whether consumers are influenced by advertised references prices. Based on an integrative review of the literature, Compeau and Grewal (1998) conclude that the mere presence of a comparison price enhances consumers' internal reference prices and overall perceptions of value, reduces search intentions, but has no significant effect on purchase intention. However, the effect on believability was not assessed because of an insufficient number of studies that have addressed this issue. In general, including a reference price in an advertisement provides the consumer with a point of comparison by which to judge the lower selling price, thus providing a basis for a more favorable evaluation of the deal. Moreover, as the gap between the advertised reference price and the selling price (i.e., advertised savings) increases, perceptions of will also increase. However, t his effect is thought to occur only so long as consumers believe that the advertised reference price has some validity. Empirical research (see Compeau and Grewal 1998, Urbany et al. 1988) supports the conclusion that reference prices, even when exaggerated, can enhance subsequent evaluations. In light of the potential harm that can come to consumers, it is important to further scrutinize the extent to which consumers believe advertisers' claims and how these claims influence consumers' evaluations of the offers. CONCEPTUAL FRAMEWORK Thaler (1985) suggests that a consumer's overall perception of the value of a purchase is not just the acquisition (i.e., the associated with possessing the product), but also includes an assessment of the deal, i.e., the transaction value. Thaler suggests that transaction utility is the comparison between the reference price and the sale price. If the reference price is greater than the sale price, the transaction utility is positive. Thaler's (1985) transaction utility has been adapted for use in understanding comparative price advertising effects, and has been called transaction value--the pleasures associated with getting a good deal (Grewal, Monroe, and Krishnan 1998). …

Expanding demand through price advertisement

Retail stores frequently advertise prices. When consumer search is costly, advertising low prices expands the number of consumers who visit and buy. We show that this demand enhancement may offset a retailer’s loss in margins from the low price, making advertisement desirable. We further show that a multi-product monopolist may choose to advertise low prices only for select products, even when advertised and non-advertised products are substitutes. For duopolist retailers at a common location, an equilibrium exists in which (for some range of advertising costs) one store advertises and the other free-rides on its competitor.

State Advertising Bans, Monopoly, and Alcohol Demand: Testing for Substitution Effects Using Panel Data

Using a panel of 45 states for the period 1982-97, this study analyzes the importance of several restrictive alcohol regulations, including advertising bans for billboards, bans of price advertising, state monopoly control of retail stores, and changes in the minimum legal drinking age. In contrast to previous research, the study allows for substitution among beverages as a response to a regulation that targets a specific beverage. A restrictive law that applies only to one beverage (or one form of advertising) can result in substitution toward other beverages (and other media). Allowing for substitution means that the net effect on total alcohol consumption is unceertain, and must be ascertained empirically. The empirical results demonstrate that monopoly control of spirits reduces consumption of that beverage, and increases consumption of wine. The effect on beer is positive, but is not statistically significant. The net effect on total alcohol is signifcantly negative. Higher minimum legal drinking age laws have negative effects on beverage and total alcohol consumption. Partial bans of advertising do not reduce total alcohol consumption, which reflects in part substitution effects.

State Advertising Bans, Monopoly, and Alcohol Demand: Testing for Substitution Effects Using Panel Data

Using a panel of 45 states for the period 1982-97, this study analyzes the importance of several restrictive alcohol regulations, including advertising bans for billboards, bans of price advertising, state monopoly control of retail stores, and changes in the minimum legal drinking age. In contrast to previous research, the study allows for substitution among beverages as a response to a regulation that targets a specific beverage. A restrictive law that applies only to one beverage (or one form of advertising) can result in substitution toward other beverages (and other media). Allowing for substitution means that the net effect on total alcohol consumption is unceertain, and must be ascertained empirically. The empirical results demonstrate that monopoly control of spirits reduces consumption of that beverage, and increases consumption of wine. The effect on beer is positive, but is not statistically significant. The net effect on total alcohol is signifcantly negative. Higher minimum legal drinking age laws have negative effects on beverage and total alcohol consumption. Partial bans of advertising do not reduce total alcohol consumption, which reflects in part substitution effects.

Image Communicated by the Use of 99 Endings in Advertised Prices

In a controlled experiment, use of the 99 rather than the 00 price ending (e.g., using $49.99 rather than $50.00) affects the impression created by a price advertisement. The 99 ending increases the likelihood that viewers judge an advertised price as relatively low and as representing a discount. However, in addition to these price-image effects, the 99 ending has negative effects on quality image in the ads sponsored by higher quality retailers. These results suggest that the choice of rightmost digits is an important executional variable in price advertising.

No link between DTC advertising and drug price hikes

No link between DTC advertising and drug price hikes

Wine Online: Search Costs and Competition on Price, Quality, and Distribution

A fundamental dilemma confronts retailers with stand-alone sites on the World Wide Web and those attempting to build electronic malls for delivery via the Internet, on-line services, or interactive TV (Alba et al. 1997). For consumers, the main potential advantage of electronic shopping over other channels is a reduction in search costs for products and product-related information. Retailers, however, fear that such lowering of consumers' search costs will intensify competition and lower margins by expanding the scope of competition from local to national and international. Retailers' electronic offerings have been constructed to thwart comparison shopping and to ward off price competition, dimming the appeal of many initial electronic shopping services. Ceteris paribus, if electronic shopping lowers the cost of acquiring price information, it should increase price sensitivity, just as is the case for price advertising. In a similar vein, though, electronic shopping can lower the cost of search for quality information. Most analyses ignore the offsetting potential of the latter effect to lower price sensitivity in the current period and ignore the potential of maximally transparent shopping systems to produce welfare gains that give consumers a long-term reason to give repeat business to electronic merchants (cf. Alba et al. 1997, Bakos 1997). We test conditions under which lowered search costs should increase or decrease price sensitivity. We conducted an experiment in which we varied independently 3 different search costs via electronic shopping: search cost for price information, search cost for quality information within a given store, and search cost for comparing across two competing electronic wine stores. Consumers spent their own money purchasing wines from two competing electronic merchants selling some overlapping and some unique wines. We show four primary empirical results. First, for differentiated products like wines, lowering the cost of search for quality information reduced price sensitivity. Second, price sensitivity for wines common to both stores increased when cross-store comparison is made easy, as many analysts have assumed. However, easy cross-store comparison had no effect on price sensitivity for unique wines. Third, making information environments more transparent by lowering all three search costs produced welfare gains for consumers. They liked the shopping experience more, selected wines they liked more in subsequent tasting, and their retention probability was higher when they were contacted 2 months later and invited to continue using the electronic shopping service from home. Fourth, we examined the implications of these results for manufacturers, and how market shares of wines sold by two stores or one were affected by search costs. When store comparison was difficult, results showed that the market share of common wines was proportional to share of distribution, but when store comparison was made easy, the market share returns to distribution decreased significantly. All of these results suggest incentives for retailers carrying differentiated goods to make information environments maximally transparent, but to avoid price competition by carrying more unique merchandise.

Aggregate advertising, sales volume and relative prices in the long run

This paper examines the relationship between advertising expenditures, sales and the cost of advertising using annual UK data over the period 1967–1997. Strong evidence is found for the existence of a cointegrating relationship between real advertising expenditures, sales volumes, goods prices and the cost of advertising messages. Error correction models fit the data well although the estimated price elasticities are not consistent with the equilibrium relationship derived from the Dorfman-Steiner equilibrium condition with a Cobb-Douglas demand function.

Comment on “A note on N. Economides: The Incentive for Non-Price Discrimination by an Input Monopolist,” by Mats Bergman

This chapter proposes an analysis of the role of advertising in the transmission of information in markets. It also describes how the economic analysis of informative advertising provides a satisfactory account of advertising practices and discusses the extent to which resorting to alternative approaches to advertising might be fruitful. In doing so, it provides an overview of what has been identified in the literature as the main incentives of firms to resort to advertising as well as the main arguments pertaining to the welfare economics of advertising. The chapter provides some simplified expositions of the various theories and describes some related empirical literature. The exposition starts with a presentation of the analysis of informative advertising. It is first explained how the informative role of advertising can be understood from the theory of search with particular attention to price advertising. Advertising that contains direct product information is then considered, looking at the nature and the amount of such information provided by advertisers and including some considerations on legal restraints on misleading advertising. Finally, the argument that advertising may provide indirect information in the form of quality signaling or as a coordination device is described and discussed. The chapter then moves on to an analysis of the technology through which advertising conveys information to consumers, considering in turn advertising costs, targeting, and information congestion. The perspective is expanded in the final part of the chapter by allowing advertising to have some role other than the transmission of information. In doing so, the welfare implications of advertising are reconsidered while accounting for a potentially persuasive role of advertising or viewing advertising as a good that complements the advertised product in the consumer's preferences. The strict consumer rationality assumption is also relaxed. The exposition ends with the dynamics of advertising resulting from its role in the accumulation of goodwill for a product or a brand.

Wine Online: Search Costs Affect Competition on Price, Quality, and Distribution

A fundamental dilemma confronts retailers with stand-alone sites on the World Wide Web and those attempting to build electronic malls for delivery via the Internet, online services, or interactive television (Alba et al. 1997). For consumers, the main potential advantage of electronic shopping over other channels is a reduction in search costs for products and product-related information. Retailers, however, fear that such lowering of consumers' search costs will intensify competition and lower margins by expanding the scope of competition from local to national and international. Some retailers' electronic offerings have been constructed to thwart comparison shopping and to ward off price competition, dimming the appeal of many initial electronic shopping services. Ceteris paribus, if electronic shopping lowers the cost of acquiring price information, it should increase price sensitivity, just as is the case for price advertising. In a similar vein, though, electronic shopping can lower the cost of search for quality information. Most analyses ignore the offsetting potential of the latter effect to lower price sensitivity in the current period. They also ignore the potential of maximally transparent shopping systems to produce welfare gains that give consumers a long-term reason to give repeat business to electronic merchants (cf. Alba et al. 1997, Bakos 1997). We test conditions under which lowered search costs should increase or decrease price sensitivity. We conducted an experiment in which we varied independently three different search costs via electronic shopping: search cost for price information, search cost for quality information within a given store, and search cost for comparing across two competing electronic wine stores. Consumers spent their own money purchasing wines from two competing electronic merchants selling some overlapping and some unique wines. We show four primary empirical results. First, for differentiated products like wines, lowering the cost of search for quality information reduced price sensitivity. Second, price sensitivity for wines common to both stores increased when cross-store comparison was made easy, as many analysts have assumed. However, easy cross-store comparison had no effect on price sensitivity for unique wines. Third, making information environments more transparent by lowering all three search costs produced welfare gains for consumers. They liked the shopping experience more, selected wines they liked more in subsequent tasting, and their retention probability was higher when they were contacted two months later and invited to continue using the electronic shopping service from home. Fourth, we examined the implications of these results for manufacturers and examined how market shares of wines sold by two stores or one were affected by search costs. When store comparison was difficult, results showed that the market share of common wines was proportional to share of distribution; but when store comparison was made easy, the market share returns to distribution decreased signi.cantly. All these results suggest incentives for retailers carrying differentiated goods to make information environments maximally transparent, but to avoid price competition by carrying more unique merchandise.

A Preliminary Study Investigating the Mere Exposure Effect Using Divided and Full Attention Conditions

There has been considerable concern exposed by marketers and advertisers about the effectiveness of different forms of message presentation. This, in turn has fuelled an on-going debate about the most efficient means of measuring advertising effectiveness. Two experiments were conducted with undergraduate and postgraduate students to investigate the application of mere exposure to marketing practice. Results indicate support for the use of mere exposure in developing consumers’ liking for a previously unfamiliar brand. Results also showed limited support for the mere exposure effect under the presentation of stimuli with divided attention. No support was found for the correction process proposed by Bornstein and D’Agostino (1992; 1994), with a greater mere exposure effect under full attention (supraliminal presentation of stimuli) than under divided attention (subliminal presentation of stimuli). The implications for applying mere exposure to the planning, placement, pricing and measurement of advertising, are discussed.

The computational effect of price endings in multi‐dimensional price advertising

Research in marketing indicates that consumers may be sensitive to the final digits of prices. For example, despite being substantively equivalent, a price such as $199 may create more favorable price perceptions than $200. However, existing research has primarily focused on the effects of price endings in the context of uni‐dimensional prices – prices consisting of a single number. Advertised prices in the marketplace are often multi‐dimensional, consisting of numerous price dimensions. In such pricing contexts, price endings may influence consumers’ ability to conduct the arithmetic required to compute the total advertised price. Examines the effect of various price ending strategies on consumers’ computational efforts. The findings indicate that the more commonly exercised price ending strategies tend to result in prices that are the most difficult for consumers to evaluate.

Pricing and Public Policy: A Research Agenda and an Overview of the Special Issue

The core element of a free-market economy is price competition. When firms engage in pricing behaviors such as price collusion, price fixing, deceptive price advertising, predatory pricing, resale price maintenance, price confusion, and price discrimination, the pricing practices of firms have an enormous impact on public welfare. It is not surprising then that a great deal of government legislation and judicial decisions focuses on the pricing behavior of firms. Moreover, federal, state, and even local government agencies continually monitor firms’ pricing practices because consumers can be harmed. Economics researchers long have investigated the effects of pricing practices on specific markets, the economy, and consumer welfare. Marketing researchers only recently have begun to research pricing practices and their public policy implications actively. In this article, the authors review and organize the main public policy issues associated with pricing and identify research questions that need to be addressed.