Price-Informative Advertising and Market Performance

Abstract

A long-standing proposition of economic theory is that real competition between firms is based on price competition. Economists have for years used the term ‘non-price competition’ to cover the product differentiation activities of firms, which tends to suggest that product differentiation (and its associated advertising) and price competition are mutually exclusive. Strictly speaking, in terms of economic theory, this is true. But the more modern approach to the empirical analysis of competition is to treat it as a process involving rivalry, whereby firms seek to gain an advantage over rivals as a result of strategic moves involving price, output, product quality, product image, service, research and development, and so on. Thus analysis of the price information provided by firms in their advertising messages may provide some useful insights into the ways in which these firms seek to compete with their rivals.