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Brand and Price Advertising in Online Markets

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Author Info

  • Michael R. Baye

    () (Kelley School of Business, Indiana University, Bloomington, Indiana 47401)

  • John Morgan

    () (Haas School of Business, University of California, Berkeley, Berkeley, California 94720)

Abstract

We model an environment where e-retailers sell similar products and endogenously engage in both brand advertising (to create loyal customers) and price advertising (to attract "shoppers"). In contrast to models where loyalty is exogenous, endogenizing the creation of loyal customers by allowing firms to engage in brand advertising leads to a continuum of symmetric equilibria; however, there is a unique equilibrium in secure strategies, and the set of equilibria converges to this unique equilibrium as the number of potential e-retailers grows arbitrarily large. Price dispersion is a key feature of all of these equilibria, including the limit equilibrium. Branding tightens the range of prices and reduces the value of the price information provided by a comparison site, and this reduces profits for platforms (such as an Internet price comparison site) where firms advertise prices. Data from a leading price comparison site are shown to be consistent with several predictions of the model.

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File URL: http://dx.doi.org/10.1287/mnsc.1090.1005
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 55 (2009)
Issue (Month): 7 (July)
Pages: 1139-1151

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Handle: RePEc:inm:ormnsc:v:55:y:2009:i:7:p:1139-1151

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Keywords: price dispersion; pricing; advertising; media; promotion;

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References

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Citations

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Cited by:
  1. Konrad, Kai A., 2010. "Merger profitability in industries with brand portfolios and loyal customers," Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" SP II 2010-08, Social Science Research Center Berlin (WZB).
  2. Yonghong An & Michael R Baye & Yingyao Hu & John Morgan, 2010. "Horizontal Mergers of Online Firms: Structural Estimation and Competitive Effects," Working Papers 2010-17, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  3. Simon P. Anderson & André De Palma, 2008. "Information Congestion," Working Papers hal-00349516, HAL.
  4. Michael R. Baye & Babur De los Santos & Matthijs R. Wildenbeest, 2012. "What's in a Name? Measuring Prominence, and its Impact on Organic Traffic from Search Engines," Working Papers 2012-09, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  5. Chioveanu, Ioana, 2008. "Advertising, brand loyalty and pricing," Games and Economic Behavior, Elsevier, vol. 64(1), pages 68-80, September.
  6. Jose Luis Moraga-Gonzalez & Matthijs R. Wildenbeest, 2011. "Comparison Sites," Working Papers 2011-04, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  7. Häring, Julia, 2005. "The Virtual Location of E-Tailers: Evidence from a B2C E-Commerce Market," ZEW Discussion Papers 05-52, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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