Coordination in Markets with Consumption Externalities: Advertising and Product Quality

This paper studies advertising in markets with positive consumption externalities. In such markets, we show that firms may engage in advertising competition to coordinate consumer expectations on their own brand as long as they produce goods of similar quality. The firm with the lower quality product has a greater incentive to advertise. Hence in equilibrium, the lower quality product will often be more popular. We would like to thank James Albrecht and Curtis Taylor for their comments on a paper we presented at the North American Winter Meetings of the Econometric Society in Washington, D.C.. This paper is a direct result of the issues they raised. We would also like to acknowledge the assistance and advice of Neil Arnwine. All errors are of course our own