The purpose of this study is to investigate the relationship between advertising and price rigidity. The result can help marketing managers to launch price promotions on appropriate products.
The approach used in the paper is a rational expectations model. The equilibrium price can provide marketing implications for coordinating strategies of advertising and pricing.
In the presence of price movements, consumers cannot use the retail price as an efficient predictor because they cannot distinguish whether lower prices reflect lower quality or just greater retail supply. A rational expectations model shows that advertising can reduce the conditional risks resulting from price promotions, while preserving the desired effect of increasing store traffic. Therefore, less price rigidity can be found in products with more advertising expenditure, due to advertising's role in risk reduction.
The link between advertising and price rigidity studied in the research has critical implications for making marketing decisions. Practitioners can use the model to design appropriate marketing strategies regarding advertising and pricing.
