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

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Author Info
Jeffrey Milyo
Joel Waldfogel

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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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Publisher 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

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bagwell, Kyle & Ramey, Garey, 1994. "Advertising and Coordination," Review of Economic Studies, Blackwell Publishing, vol. 61(1), pages 153-72, January. [Downloadable!] (restricted)
    Other versions:
  2. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr. [Downloadable!] (restricted)
  3. Steven Salop & Joseph Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
    Other versions:
  4. Glazer, Amihai, 1981. "Advertising, Information, and Prices-A Case Study," Economic Inquiry, Oxford University Press, vol. 19(4), pages 661-71, October.
  5. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 63-81, January. [Downloadable!] (restricted)
  6. D. Grant Devine & Bruce W. Marion, 1979. "The Influence of Consumer Price Information on Retail Pricing and Consumer Behavior," Framed Field Experiments 0017, The Field Experiments Website. [Downloadable!]
  7. 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. [Downloadable!] (restricted)
  8. Cady, John F, 1976. "An Estimate of the Price Effects of Restrictions on Drug Price Advertising," Economic Inquiry, Oxford University Press, vol. 14(4), pages 493-510, December.
  9. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug.. [Downloadable!] (restricted)
  10. Benham, Lee, 1972. "The Effect of Advertising on the Price of Eyeglasses," Journal of Law & Economics, University of Chicago Press, vol. 15(2), pages 337-52, October.
  11. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July. [Downloadable!] (restricted)
  12. Kwoka, John E, Jr, 1984. "Advertising and the Price and Quality of Optometric Services," American Economic Review, American Economic Association, vol. 74(1), pages 211-16, March.
  13. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213. [Downloadable!] (restricted)
  14. Peters, Michael, 1984. "Restrictions on Price Advertising," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 472-85, June. [Downloadable!] (restricted)
  15. Aaron Edlin, 1995. "Do Guaranteed-Low-Price Policies Guarantee High Prices, and Can Antitrust Rise to the Challenge," Berkeley Olin Program in Law & Economics, Working Paper Series 1153, Berkeley Olin Program in Law & Economics. [Downloadable!]
  16. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 465-91, October. [Downloadable!] (restricted)
  17. Feldman, Roger D & Begun, James W, 1980. "Does Advertising of Prices Reduce the Mean and Variance of Prices?," Economic Inquiry, Oxford University Press, vol. 18(3), pages 487-92, July.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Joel Waldfogel & Lu Chen, 2003. "Does Information Undermine Brand? Information Intermediary Use and Preference for Branded Web Retailers," NBER Working Papers 9942, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Karen Clay & Ramayya Krishnan & Eric Wolff, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," NBER Working Papers 8271, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Bergen, Mark & Levy, Daniel & Ray, Sourav & Rubin, Paul & Zeliger, Ben, 2006. "When Little Things Mean a Lot: On the Inefficiency of Item Pricing Laws," MPRA Paper 1158, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  4. Emin M. Dinlersoz & Han Li & Roger Sherman & Rubén Hernández-Murillo, 2006. "Information and drug prices: evidence from the Medicare discount drug card program," Working Papers 2005-072, Federal Reserve Bank of St. Louis. [Downloadable!]
  5. Michael Chernew & Gautam Gowrisankaran & Dennis P. Scanlon, 2002. "Learning and the value of information: the case of health plan report cards," Working Papers in Applied Economic Theory 2002-17, Federal Reserve Bank of San Francisco. [Downloadable!]
  6. repec:bep:buspol:6:2004:2:1070-1070 is not listed on IDEAS
  7. Brown, Jeffrey, 2000. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Working Paper Series rwp00-007, Harvard University, John F. Kennedy School of Government. [Downloadable!]
    Other versions:
  8. Simbanegavi, Witness, 2008. "Loss leader or low margin leader? Advertising and the degree of product differentiation," MPRA Paper 9694, University Library of Munich, Germany. [Downloadable!]
  9. Tülin Erdem & Michael Keane & Baohong Sun, 2008. "The impact of advertising on consumer price sensitivity in experience goods markets," Quantitative Marketing and Economics, Springer, vol. 6(2), pages 139-176, June. [Downloadable!] (restricted)
  10. Mullins, Michelle & Milyo, Jeffrey & Sykuta, Michael, 2006. "Regulating for Public Health: Motivations for and Efficacy of State Alcohol Regulations," 2006 Annual meeting, July 23-26, Long Beach, CA 21176, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  11. Enrique Fatas & Juan Mañez, 2007. "Are low-price promises collusion guarantees? An experimental test of price matching policies," Spanish Economic Review, Springer, vol. 9(1), pages 59-77, March. [Downloadable!] (restricted)
  12. Nelson, Jon P., 2001. "Alcohol Advertising and Advertising Bans: A Survey of Research Methods, Results, and Policy Implications," Working Papers 7-01-2, Pennsylvania State University, Department of Economics. [Downloadable!]
  13. Ginger Zhe Jin & Alex Whalley, 2007. "The Power of Attention: Do Rankings Affeect the Financial Resources of Public Colleges?," NBER Working Papers 12941, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Enrique Fatás & Juan A. Mañez, 2004. "Are Low-Price Compromises Collusion Guarantees? An Experimental Test of Price Matching Policies," Economic Working Papers at Centro de Estudios Andaluces E2004/33, Centro de Estudios Andaluces. [Downloadable!]
  15. Jeffrey R. Brown & Austan Goolsbee, 2000. "Does the Internet Make Markets More Competitive?," NBER Working Papers 7996, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Nelson, Jon P., 2001. "Advertising Bans, Monopoly, and Alcohol Demand: Testing for Substitution Effects Using Panel Data," Working Papers 1-01-1, Pennsylvania State University, Department of Economics. [Downloadable!]
  17. Renato D.B. Gomes & João Manoel Pinho de Mello, 2006. "Non-price advertising and price competition: a theory, and evidence from the Brazilian beer market," Textos para discussão 525, Department of Economics PUC-Rio (Brazil). [Downloadable!]
  18. Sun, Ching-jen, 2005. "Dynamic Price Dispersion in a Bertrand-Edgeworth Model," MPRA Paper 9854, University Library of Munich, Germany, revised Dec 2007. [Downloadable!]
  19. Jon Nelson, 2003. "Advertising Bans, Monopoly, and Alcohol Demand: Testing for Substitution Effects using State Panel Data," Review of Industrial Organization, Springer, vol. 22(1), pages 1-25, February. [Downloadable!] (restricted)
  20. Hamilton, Stephen F. & Richards, Timothy J. & Stiegert, Kyle W., 2009. "How Does Advertising Affect Market Performance? The Case of Generic Advertising," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49187, Agricultural and Applied Economics Association. [Downloadable!]
  21. Michael Chernew & Gautam Gowrisankaran & Dennis P. Scanlon, 2001. "Learning and the Value of Information: Evidence From Health Plan Report Cards," NBER Working Papers 8589, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  22. Luca Bonardi, 2001. "Analysis of the Relationship Between Advertising, Concentration and Profitability in the United States Manufacturing Industry," Fordham Economics Dissertations 2002.3, Fordham University, Department of Economics. [Downloadable!]
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