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The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart

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  • Joel Waldfogel
  • Jeffrey Milyo

Abstract

The 44 Liquormart decision, eliminating Rhode Island's ban on liquor price advertising, made Rhode Island the subject of a natural experiment for measuring the effect of advertising on prices. Using Massachusetts prices as controls, we find that advertising stores substantially cut only prices of the products that they advertise. Prices of other products, at both advertising and nonadvertising stores, do not change. Advertising stores cut their prices on products advertised by rivals, while nonadvertising stores do not. We find no reductions in price dispersion across stores. Newspaper-advertising stores appear to draw a higher share of customers after they advertise.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 89 (1999)
Issue (Month): 5 (December)
Pages: 1081-1096

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Handle: RePEc:aea:aecrev:v:89:y:1999:i:5:p:1081-1096

Note: DOI: 10.1257/aer.89.5.1081
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  1. Benham, Lee, 1972. "The Effect of Advertising on the Price of Eyeglasses," Journal of Law and Economics, University of Chicago Press, vol. 15(2), pages 337-52, October.
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  8. Feldman, Roger D & Begun, James W, 1980. "Does Advertising of Prices Reduce the Mean and Variance of Prices?," Economic Inquiry, Western Economic Association International, vol. 18(3), pages 487-92, July.
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  12. Peters, Michael, 1984. "Restrictions on Price Advertising," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 472-85, June.
  13. Comanor, William S & Wilson, Thomas A, 1979. "The Effect of Advertising on Competition: A Survey," Journal of Economic Literature, American Economic Association, vol. 17(2), pages 453-76, June.
  14. Cady, John F, 1976. "An Estimate of the Price Effects of Restrictions on Drug Price Advertising," Economic Inquiry, Western Economic Association International, vol. 14(4), pages 493-510, December.
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