|M.Sc Student||Aluf Yana|
|Subject||Comparison Advertising of Differentiated Brands|
|Department||Department of Industrial Engineering and Management||Supervisor||Dr. Oz Shy|
Comparison advertising is widely used and viewed as a powerful tool in the modern marketing. Comparison advertising is commonly observed in industries with the high level of competition among firms producing or selling potentially homogeneous products. However, despite the widespread use of this tool, in scientific literature we hardly find theoretical explanation for the use of comparison advertising.
In most countries the law generally permits the use of comparison advertising as long as it is neither misleading nor untruthful.
This dissertation constructs two models in order to explain two effects of comparison advertising: (a) the resulting increase in differentiation of potentially homogeneous products and (b) an improvement of the firm’s image.
The models modify Hotelling (1929) location model that studies horizontal product differentiation, caused by the variety of tastes in the consumer population.
The first model models comparison advertising as one that decreases the value of the competing brand. Our modification of the classic Hotelling location model is that the differentiation between the firm’s product and the ideal product of the consumer increases with the level of comparison advertising of the competing firm. Thus, comparison advertising relaxes price competition by making the brands more differentiated.
This dissertation also studies the effect of semicollusion in comparison advertising on the level of market competition. By semicollusion we mean the process by which firms collude on a uniform advertising level, while the price levels are determined by the firms in the non-cooperative manner.
The solution of the model highlights the non-competitive effect of semicollusion in comparison advertising. This brings us to conclude that industries with high level of comparison advertising need to be closely monitored by the relevant antitrust authorities.
The second model deals with the image effect of comparison advertising. The firm that utilizes comparison advertising tries to convince consumers that its brand is better then the competitor’s one. Thus, consumers gain additional utility from purchasing “the best” product. The model studies advertising strategies of two firms with the different market shares.