In this paper, we analyze the impact of advertising on markets where subjective horizontal and vertical product differentiation are important. A simple model shows how advertising can be used to create subjective horizontal and vertical differentiation. The model predicts that firms are likely to be symmetric when advertising creates subjective horizontal differentiation and that name and generic brands are most likely to coexist in markets where advertising creates subjective vertical differentiation. In all cases, the ability to advertise creates distance between products which increases the market power of firms. Finally, several real world examples are used to illustrate the conditions under which the model is most relevant.
- Horizontal differentiation
- Persuasive advertising
- Price competition
- Vertical product differentiation