The Dynamic Persuasive and Informative Advertising Strategy of a Two-Part Tariff Monopolist with Advertising Spillover Effects

The pervasive adoption of mobile devices and proximity technologies enables firms to trace consumers’ trajectories and locations. This connects firms’ marketing and operations strategies more tightly with consumer mobility. In this paper, we propose a novel analytical model to examine the economic effects of consumer mobility on pricing and advertising strategies by incorporating consumers’ Lévy-walking behavior into advertising economics models. We ascertain the convergent effect of consumer mobility, i.e., consumers’ convergence to a firm leads to higher product price and advertising level. Meanwhile, it improves social welfare by increasing firm profit and consumer surplus. More interestingly, we find that consumers’ average movement distance (AMD) has opposing influences in pricing and advertising strategies. Specifically, longer AMD strengthens the convergent effect on advertising strategy but weakens that on pricing strategy. Finally, we also conduct a numerical analysis to uncover the impacts of the presence of proximity technologies on advertising outcomes. The results of this paper provide advisable guidance to firms on how to craft and adjust pricing and advertising strategies in accordance to consumer mobility. Moreover, the results present insights on welfare implications of informative advertising from the perspective of consumer mobility.

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The Dynamics of Advertising and Contract Choice on the Champagne Wine Market

Journal of Wine Economics ◽

10.1017/s1931436100000961 ◽

2010 ◽

Vol 5 (2) ◽

pp. 310-326 ◽

Cited By ~ 1

Author(s):

Hervé Lanette ◽

Daniel Steichen

Keyword(s):

Theoretical Models ◽

Spillover Effects ◽

Jel Classification ◽

Wine Industry ◽

Monopoly Power ◽

Supply Contracts ◽

Advertising Strategy ◽

Contract Choice ◽

Positive Externalities

AbstractThere are two main players in the Champagne wine industry; grape growers and Champagne houses. The former grow grapes and either produce their own Champagne wine or sell their fruit to Champagne houses. The latter only produce Champagne wine and do not grow grapes. However, Champagne houses invest heavily in advertisements to establish and maintain their brand's reputation. The grape market is characterized by the dominance of long-term supply contracts over spot contracts. Drawing on various theoretical models we suggest that the Champagne houses' advertising strategy and its associated positive externalities (spillover effects) on grape growers is a way of stabilizing vertical relations, i.e., keeping grape growers from producing Champagne wine themselves and thus maintaining a certain degree of monopoly power. (JEL Classification: C78, M37, D86, L14, Q18)

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