Diffusion and pricing over the product life cycle

Abstract: This is an important work. It addresses a controversial topic and attempts to answer questions currently posed by the FTC and of concern to anyone with an interest in advertising. Among the questions addressed by Lambin are: "Is advertising responsible for entry barriers?", "Does advertising inhibit competitive rivalry?", and "Does advertising limit price and product quality competition?". The author goes a long way in answering these questions and his summary and conclusions should be required reading for those persons who make a serious study of advertising. Some of Lambiri's findings are: (1) advertising plays an important role in generating sales, but its impact is relatively minor when compared to other marketing variables, such as price and product quality; (2) current advertising can help create brand loyalty (or inertia) which leads to reducing competitive entry into the market; (3) advertising response thresholds appear to exist and give an advantage to firms who can afford to spend beyond this level; and (4) once beyond the threshold level, decreasing returns to advertising limit the power of larger firms. Lambin's investigation is a comprehensive marketing study. The data base is broad and includes 107 brands, associated with 16 product classes and 8 European countries. The selected products represent a good balance between goods and services, consumer and industrial markets, and products in both the early and late stages of the life cycle. The demand models include competitive behavior and other marketing variables as well as advertising expenditures. The text includes a discussion of the role of advertising in an oligopoly and a review of previous literature. The chapter describing the empirical results is well structured. It starts with a general conclusion drawn by Lambin; this is followed by a description of the empirical results which lead him to generalizations; and then the implications of the generalizations are discussed. This format makes it easier for the reader to review and evaluate the author's inferences. Unfortunately, the readership of this book will be limited because the bulk of the text requires a reader familiar with econometrics. The author draws his conclusions from numerous demand analyses, and his discussion assumes a sophisticated reader. The appendix contains 120 pages of regression analyses, results, and summary data. Occasionally, the author can be criticized for his analysis and inferences drawn from these analyses. For example, the author compares the magnitude of coefficients within and across equations without testing for significant differences. And he infers the importance of the independent variables in explaining the dependent variables by using the ordering from a step-wise regression procedure rather than by using beta coefficients (i.e., standardizing the variables). Further, the author rejects the existence of an S-shaped sales/advertising function without testing against such a functional form. Despite these negative points the analysis is interesting, the issues studied are important ones, and the results should be noted by both advertisers and advertising critics.

TL;DR: In this paper, the authors provide a model of firm and industry dynamics that allows for entry, exit, and firm-specific uncertainty generating variability in the fortunes of firms, focusing on the impact of uncertainty arising from investment in research and exploration.