Price advertisement by retail stores is pervasive. If there exist non-negligible costs of consumer search, a retailer can increase the number of consumers visiting its location by advertising a low price, thus increasing consumers' expected utilities from search. If the increase in the number of consumers who visit the store is substantial, then the store's profit goes up even though low prices decrease profit margins. We show that this intuition extends to the case of a multi-product monopolist, who may choose to advertise very low prices for a limited number of items it carries, even when advertised and non-advertised commodities are substitutes. Finally, we analyze a retail duopoly in which both stores sell from the same location, showing that under some circumstances, there is an incentive for one of the retailers to free-ride on the other's advertisement.
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Length: 29 pages Date of creation: 20 Jan 2000 Date of revision:
21 Jun 2001 Publication status: Published, International Journal of Industrial Organization, 20, 965-994, 2002. Handle: RePEc:boc:bocoec:453
Note: Previously circulated as Price Advertisement by Retail Stores: A Commitment Device Contact details of provider: Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA Phone: 617-552-3670 Fax: +1-617-552-2308 Email: Web page: http://fmwww.bc.edu/EC/ More information through EDIRC
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Find related papers by JEL classification: D4 - Microeconomics - - Market Structure and Pricing L0 - Industrial Organization - - General M3 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising
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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.:
Chen, Yongmin & Rosenthal, Robert W, 1996.
"Asking Prices as Commitment Devices,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 129-55, February.
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