Advertising and Conspicuous Consumption

This paper formalizes the intuition that brands are consumed for image reasons and that advertising creates a brand's image. The key idea is that advertising informs the public of brand names and creates the possibility of conspicuous consumption by rendering brands a signalling device. In a price-competition framework, we show that advertising increases consumers' willingness to pay and thus provide a foundation, based on optimization behaviour, for persuasive approaches to advertising. Moreover, an incumbent might strategically overinvest in advertising to deter entry, there might be too much advertising, and competition might be socially undesirable.