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Existence Advertising, Price Competition, and Asymmetric Market Structure

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  • Ian MacDonald
  • Laura Meriluoto
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    Abstract

    We examine a duopoly pricing game where some customers know of no firms, others know of only one firm, and some know of both firms. Firms have constant and identical marginal costs, sell homogenous goods and choose prices simultaneously. Customers observe the prices of the firms that are known to them. We show that there is no equilibrium in pure price strategies for this game. We find a mixed strategy equilibrium, and show that it has intuitively appealing comparative static properties. We then examine the two stage game in which firms advertise their existence in stage 1 to create their customer bases, and in stage 2 play the pricing game described above. The equilibrium to the two stage game is asymmetric, and far from the Bertrand equilibrium.

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    Bibliographic Info

    Paper provided by Department of Economics, University of Calgary in its series Working Papers with number 2008-10.

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    Date of creation: 01 Feb 2008
    Date of revision: 13 Feb 2008
    Handle: RePEc:clg:wpaper:2008-10

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    Related research

    Keywords: Existence advertising; price dispersion; Bertrand paradox; information; duopoly;

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