Achieving the Optimal Balance Between Investment In Quality and Investment in Self-Promotion

When producers of goods (or services) are confronted by a situation in which their offerings no longer perfectly match consumer preferences, they must determine the extent to which the advertised features of the product reflect the product’s actual attributes. We find that the two important determinants of sellers’ advertising strategy are the Repeg cost ratio, Rp, and the Repeat Sales Coefficient, Rs. The interplay of these two factors give rise to four possible strategic scenarios. We show that sellers’ strategy is clearly explainable in three out of these four scenarios. In this ambiguous fourth scenario, we show that sellers’ strategy for information production goods will differ considerably from physical consumption and durable goods. Further, we show how network effects can play a significant role in determining sellers’ strategy in the case of some physical durable goods.