Should New Products Use Advertising and Price Promotions Simultaneously

Abstract

This research aims to study how advertising and price promotions interact as consumers with advertising information increases. A rational expectations model shows that an advertising threshold of quality indication exists. Before reaching the threshold, consumers depend more on prices to infer quality as advertising information diffuses. At this stage, advertising and price promotions offset each other’s strengths so that they should not use simultaneously. After advertising coverage crosses threshold, consumers gradually tend to use advertising information to infer product quality. At this stage, advertising can reduce negative effects from price promotions and makes price promotions more effective at generating sales.