Scandinavian Working Papers in Economics
Memorandum,
Oslo University, Department of Economics
No 24/2006: Advertising as Distortion of Learning in Markets with Network Externalities
Kjell Arne Brekke () and Mari Rege ()
Additional contact information
Kjell Arne Brekke: The Ragnar Frisch Centre for Economic Research, Postal: Gaustadalléen 21, N-0349 Oslo, Norway
Mari Rege: University of Stavanger, Postal: 4036 Stavanger, Norway
Abstract: We present a theory of how advertising can break a lock-in by distorting beliefs about market shares in markets with network externalities. On the background of the availability heuristic we assume that people learn about market shares by observing product adoption of others, but are not able to fully distinguish between observations of real people and …ctitious characters in advertisements. We look at a game between an incumbent and an entrant producing close substitutes. Our analysis shows that if the entrant’s product is of su¢ ciently high quality, then the entrant will use advertising in order to break the lock-in and the incumbent will not advertise at all. However, if the quality di¤erential between the two products is small, then the incumbent may advertise and make it unpro…table for the entrant to break the lock-in.
Keywords: Advertising; availability heuristic; herding behavior; information; lock-in
28 pages, November 23, 2006
Full text files
Memo-24-2006.pdf
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