We sold a million units: the role of advertising past-sales

Abstract

Summary: 1. Introduction; 2. The model; 3. The first-period optimal decision; 4. The basic case: Second-generation buyers are uninformed; 5. Extension: Second-generation consumers are better informed; 6. Conclusions.Keywords: two-sided uncertainty; past-sales advertising; pooling; signalling; herding.JEL codes: D82; L15; M37.In a market where past-sales embody information about consumers' tastes, we analyze a seller's incentives to invest in a costly advertising campaign to report past-sales. If consumers are poorly informed, a pooling equilibrium with past-sales advertising obtains. Information revelation only occurs when the seller benefits from the consumers' herding behavior brought about by the advertising campaign. If consumers are better informed, a separating equilibrium with past-sales advertising arises. Information revelation always happens, either through prices or through costly advertisements.Em um mercado no qual as vendas passadas transmitem informação a respeito dos gostos dos consumidores, nós analisamos os incentivos de uma firma a investir em propaganda que divulga o total vendido no passado. Se os consumidores não tem informação própria, o preço de equilíbrio independe da qualidade do produto. Se os consumidores tem informação própria, mesmo que imprecisa, há um equilíbrio separador no qual a firma investe em propaganda.

Free entry, market diffusion, and social inefficiency with endogenously growing demand

“…For a survey of the literature on network externalities, seeKatz and Shapiro (1994).11 Caminal and Vives (1996) analyze the importance of past market share as a signal of product quality Monteiro and Gonzalez (2003). analyze the role of past-sales advertising as a corporate strategy.Grinblatt, Keoharju, and Ikäheimo (2008) find that the purchases of neighbors influence a consumer's purchases of automobiles.12 There is also the bandwagon effect(Leibenstein, 1950) Becker (1991).…”