Concluding remarks

This paper has shown that the advertisement spillover effect may impact the distance between the two firms. At first, we signify the importance of advertisement information in affecting consumers’ awareness. Extending the advertisement effect to firms running similar businesses has generated other advertisement effect: the advertisement spillover effect. It represents consumers receive one firm’s informative advertisement will realize the other firms’ product quality simultaneously. That is, the advertisement provided by one firm may encourage consumers to purchase similar products from its rivals.

We develop a three-stage game model with informative advertisement and spillover effect based on Hotelling model. Then, we discuss the advertisement spillover effect on firms’ location choices in two ways: (1) The transportation costs are incurred by consumers. After receiving informative message, consumers’

awareness of the product quality will increase. Consumers will purchase the products at firms’ locations and choose to buy from the firm where they can receive greater surplus. (2) The distribution costs are paid by the firms. After consumers receive the advertisement information, they order the products from the firms and ask for deliver service. The firms have to spend the distribution cost delivering the products to consumers’ locations. The firms only deliver the products to consumers’ locations where they can receive greater surplus.

We find that no matter who pay the transportation/distribution costs, both of the results are identical. The two firms’ distance increases while the rate of transportation/distribution fee decreases. The advertisement spillover effect and the distance between the two firms are negatively related. This implies that the firms are

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willing to cluster for the spillover effect is getting greater. Though the two cases we discuss in this paper obtain the same conclusion. But, the conclusion can be used in different applications in location choice. For example, in the case of consumers pay the transportation cost, higher spillover effect forces the firms to cluster. Yet, in the case of firms pay the distribution cost, higher spillover effect will reduce the number of firms. Extremely, if the advertisement with perfect spillover effect, the headquarter will cancel the system of dual exclusive agents or subsidiaries into one.

Nelson (1970, 1974) made a distinction between qualities of goods: search goods and experience goods. He showed that advertisement for search goods provides consumers with specification of the product qualities and characteristics.

Consequently, consumers desire the advertisement search goods will compare the firms’ product quality and purchase from the firms who they prefer. The firms will tend to minimize the transportation distance for consumers. In contrast, advertisement for experience goods notice consumers the existence of the product. Consumers do not know the product quality until they experience it. The transportation costs are not important comparatively. Nelson further concluded that stores sell search goods cluster more than stores sell experience goods. In this paper, we consider that search goods are the products with greater advertisement spillover effect since the products with more clear specifications will be easier to be understood through informative advertisement; whereas, experience goods are the product with trivial advertisement spillover effect because consumers can hardly know one firm’s product information from the other firm’s advertisement. Hence, our finding of advertisement spillover effect will enhance the firms to cluster is complementary to Nelson’s conclusion and provides a new support from the perspective of spillover effect.

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