Abstract
This paper extends the entry deterrence literature by examining coordinating advertising and pricing in markets with consumption externalities using a stochastic success function. Optimal advertising and pricing strategies are analysed when an incumbent firm faces a challenger with a product of equal quality. I show that strategic entry deterrence using advertising is possible and optimal entry deterrence involves strategic pre-commitment to over-investment relative to the non-strategic simultaneous advertising benchmark. I show that when entry deterrence is not possible the incumbent does not possess a first mover advantage and optimal entry accommodation involves strategic investment in advertising with intensified price competition congruent with the non-strategic simultaneous advertising benchmark. The findings suggest that an incumbent’s ability to deter entry through coordinating advertising in a market with products of equal quality is sensitive to the size of the fixed cost of entry that the challenger must incur and the consumption externality parameter.
Acknowledgements
The author is grateful for comments and suggestions by three anonymous referees and by the editor, Yuk-Fai Fong, who helped to improve the article. She would also like to thank Rowena Pecchenino, Tuvana Pastine and Gerda Dewit for their guidance and insightful discussions regarding this research over the course of her doctoral studies.
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Articles in the same Issue
- Research Articles
- Sustaining Cooperation Through Strategic Self-Interested Actions
- Endogenous Markup, Per Capita Income and Population Size in the Gravity Equation
- Profits Under Centralized Negotiations: The Efficient Bargaining Case
- Disentangling Intertemporal Substitution and Risk Aversion Under the Expected Utility Theorem
- Managerial Delegation Contracts, “Green” R&D and Emissions Taxation
- Entry Deterrence, Coordinating Advertising and Pricing in Markets with Consumption Externalities
- Do Time Preferences Matter in Intertemporal Consumption and Portfolio Decisions?
- From Jungle to Civilized Economy: The Power Foundation of Exchange Economy Equilibrium
- Endogenous Matching and Money with Random Consumption Preferences
- Notes
- An Asymmetric Duopoly Model of Price Framing
- A First Price Auction with an Arbitrary Number of Asymmetric Bidders
- Stable Matching with Double Infinity of Workers and Firms
Articles in the same Issue
- Research Articles
- Sustaining Cooperation Through Strategic Self-Interested Actions
- Endogenous Markup, Per Capita Income and Population Size in the Gravity Equation
- Profits Under Centralized Negotiations: The Efficient Bargaining Case
- Disentangling Intertemporal Substitution and Risk Aversion Under the Expected Utility Theorem
- Managerial Delegation Contracts, “Green” R&D and Emissions Taxation
- Entry Deterrence, Coordinating Advertising and Pricing in Markets with Consumption Externalities
- Do Time Preferences Matter in Intertemporal Consumption and Portfolio Decisions?
- From Jungle to Civilized Economy: The Power Foundation of Exchange Economy Equilibrium
- Endogenous Matching and Money with Random Consumption Preferences
- Notes
- An Asymmetric Duopoly Model of Price Framing
- A First Price Auction with an Arbitrary Number of Asymmetric Bidders
- Stable Matching with Double Infinity of Workers and Firms