Review of Industrial Organization 20: 253–265, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Advertising with Subjective Horizontal and Vertical
VICTOR J. TREMBLAY
Department of Economics, 303 Ballard Extension Hall, Oregon State University, Corvallis, OR
Department of Applied Economics, University of Minnesota, Twin Cities, 1994 Buford Avenue, St.
Paul, MN 55108, U.S.A.
In this paper, we analyze the impact of advertising on markets where subjective horizontal and
vertical product differentiation are important. A simple model shows how advertising can be used
to create subjective horizontal and vertical differentiation. The model predicts that ﬁrms are likely
to be symmetric when advertising creates subjective horizontal differentiation and that name and
generic brands are most likely to coexist in markets where advertising creates subjective vertical
differentiation. In all cases, the ability to advertise creates distance between products which increases
the market power of ﬁrms. Finally, several real world examples are used to illustrate the conditions
under which the model is most relevant.
Key words: Horizontal differentiation, persuasive advertising, price competition, vertical product
JEL Classiﬁcations: D21; D43; L15; M37.
An important issue in economics concerns the impact of advertising on the price-
setting process, especially in imperfectly competitive markets. According to Kaldor
(1949–1950) and Bain (1956), advertising is socially wasteful because it en-
hances brand loyalty by creating subjective or perceived product differentiation.
Alternatively, Stigler (1961) and Telser (1964) emphasize the informative role of
advertising. By providing consumers with useful product information, advertising
leads consumers to lower priced commodities that have more preferred character-
We would like to thank Simon Anderson, Laura Connolly, Art O’Sullivan, William Shepherd,
and Carol Tremblay for many helpful comments on an earlier version of the paper and Okmyung Bin
for valuable research assistance. The usual caveat applies.