“Tiers, Advertisement and Product Design” by In-Koo Cho
University of Illinois at Urbana-Champaign
A multi-product firm typically pools different products into tiers and advertises the tier instead of individual products, while tailoring the design of each product to a specific tier. This paper examines an equilibrium foundation of tiers, advertisement and design of products. A product is a profile of multiple attributes with different levels of quality. We analyze a signaling game preceded by a stage where the firm chooses the design of products. Observing the utility of the designed product, the firm advertises. A consumer purchases the good, conditioned on the advertisement. We show that the firm can pool different products into the same tier, to advertise the tier instead of the individual product, in an equilibrium surviving criterion D1 (Cho and Sobel (1990)). The support of the equilibrium distribution of utilities of products in different tiers may overlap, refuting the claim that the overlap cannibalizes the same consumer base of different products of the firm (Aribarg and Arora (2008)).