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Informative advertising by heterogeneous firms

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Author Info

  • Dinlersoz, Emin M.
  • Yorukoglu, Mehmet

Abstract

This paper introduces a model to analyze the role of the cost of information dissemination in large markets where firms have varying degrees of intrinsic efficiency reflected in their marginal costs. Firms enter a market and discover how efficient they are. Those firms with high enough efficiency stay, others exit. Remaining firms then compete to attract consumers by disseminating information about their existence and their prices using a common advertising technology. The properties of the model's equilibrium are analyzed. The model is then used to study the effect of the cost of information dissemination on the competitiveness of the market and key industry aggregates, such as price distribution and the distribution of firm value.

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Bibliographic Info

Article provided by Elsevier in its journal Information Economics and Policy.

Volume (Year): 20 (2008)
Issue (Month): 2 (June)
Pages: 168-191

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Handle: RePEc:eee:iepoli:v:20:y:2008:i:2:p:168-191

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Web page: http://www.elsevier.com/locate/inca/505549

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References

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  1. Wilde, Louis L & Schwartz, Alan, 1979. "Equilibrium Comparison Shopping," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 543-53, July.
  2. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-86, May.
  3. Reinganum, Jennifer F, 1979. "A Simple Model of Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 851-58, August.
  4. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
  5. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
  6. Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-23, March.
  7. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  8. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February.
  9. 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.
  10. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  11. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  12. Ireland, Norman J, 1993. "The Provision of Information in a Bertrand Oligopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 41(1), pages 61-76, March.
  13. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October.
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Cited by:
  1. Costas Arkolakis, 2008. "Market Penetration Costs and the New Consumers Margin in International Trade," NBER Working Papers 14214, National Bureau of Economic Research, Inc.
  2. Fan, Haichao & Lai, Edwin L.-C. & Li, Yao Amber, 2012. "Credit Constraints, Quality, and Export Prices: Theory and Evidence from China," MPRA Paper 40857, University Library of Munich, Germany.

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