Advertising: "The Good, the Bad and the Ugly"

Abstract

We model the choice of firms competing in prices in a differentiated products market to bundle advertising messages with their goods in return for payment from advertisers. From the firms’ perspective, the potential to earn revenue from advertisers, makes advertising a “good”. However, because consumers in the product market dislike such advertising, the bundling dampens demand and in this sense is a “bad”. There is also a third role played by advertising, however. Since a firm that bundles advertisements with its good sells a less attractive good, it has to price more aggressively than one that does not do such bundling. Thus, bundling advertisements with the good can lead to more aggressive product pricing and thereby intensify product market competition. In this sense, advertising can make things “ugly”.