Persuasive advertising in Hotelling's model of product differentiation

This paper analyzes the effect of persuasive advertising in a model where consumers differ in their tastes for two competing products. Advertising is viewed as a means by which a firm can shift the distribution of consumer tastes towards one of the products. When both products are sold by the same firm, advertising:leads to an increase in the price of the advertised product and a decrease in the price of the other product. The monopolist's profit is higher when the distribution is concentrated around one of the products, so that advertising is profitable only if the original distribution of consumer tastes is not too biased towards one of the products. When the two products are sold by different firms, advertising may induce a decrease in the price of the advertised product, showing that a firm does not necessarily have an incentive to engage in advertising. (C) 1999 Elsevier Science B.V. All rights reserved.