When and How Should Firms Differentiate? Quality and Advertising Decisions in a Duopoly

A prominent hallmark of competitive interaction is the desire to differentiate from rivals. In this article, authors examine under what conditions firms will through product quality versus advertising intensity. Firms select in a first stage, second and price last stage. The probability that consumer informed firm’s offering depends on its expenditure. find when not cost effective, both choose light ad spending. This allows them minimally without concern intense competition, as each firm has segment “captive” consumers. When moderately one spends heavily advertising. rival advertises lightly, while choosing same maximal level. strategy softens competition by inducing heavy advertiser high more often capitalize large captive segment. very advertise quality. Three extensions are examined: upfront fixed costs, continuous levels, simultaneous pricing decisions. research reveals letting market awareness be determined endogenously suggests less differentiation than previously suspected regions differentiation.