Multi-Product Competition and Informative Advertising

Multi-Product Competition and Informative Advertising In several product categories, such as cereals, ice cream, and detergents, competing firms market a variety of products to meet the needs of their diverse consumers. Furthermore, these firms inform consumers about their products using advertising. In this paper, we propose a novel framework for studying multi-product competition and informative advertising in a horizontally differentiated market. Our conceptualization of product advertising and brand advertising recognizes that consumer’s attention span is limited, consumer memory is fallible and captures effects such as advertising clutter, advertising confusion, and brand dilution. Using the framework, we analyze how market structure and different types of informative advertising affect a firm’s product-line length. We find that, when firms release product specific advertising, the number of products offered by a monopolist increases with advertising reach, but the result is reversed in the presence of competition. By contrast, when firms release brand advertising to inform consumers about their products, the length of product-line can be increasing for both the monopolist and duopolists, but under very different conditions. In choosing between product and brand advertising, the monopolist favors brand advertising. The duopolists, on the other hand, prefer product advertising; however, they increase the emphasis placed on brand advertising as the diversity in consumers’ taste increases or consumers’ attention span decreases.