Returns to product promotion when consumers are learning how to consume

This paper presents a computational model of consumer behavior. We consider two sources of product-specific consumer skill acquisition: learning by consuming and consumer socialization. Consumers utilize these two sources in order to derive higher valuations for products they consume. In this framework, we discuss the behavior of returns to advertising relative to changes in product characteristics, such as quality and user-friendliness. The main finding is that, in the case of duopoly, dependence of returns to advertising on product quality is not monotonic as had been suggested by earlier studies. Rather, returns have an inverted U shape, given the quality of the competing product.