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Asymmetric Market Shares, Advertising, and Pricing: Equilibrium with an Information Gatekeeper

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Author Info

  • Michael A. Arnold

    ()
    (Department of Economics,University of Delaware)

  • Chenguang Li

    (Indiana University)

  • Christine Saliba

    (University of Delaware)

  • Lan Zhang

    (Indiana University)

Abstract

We analyze the impact of market share on advertising and pricing decisions by firms that sell to loyal, non-shopping customers and can advertise to shoppers through an information intermediary or "gatekeeper." In equilibrium the firm with the smaller loyal market advertises more aggressively but prices less competitively than the firm with the larger loyal market, and there is no equilibrium in which both firms advertise with probability 1. The results differ significantly from earlier literature which assumes all prices are revealed to shoppers and finds that the firm with the smaller loyal market adopts a more competitive pricing strategy. The predictions of the model are consistent with advertising and pricing behavior observed on price comparison websites such as Shopper.com.

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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2008/UDWP2008-14.pdf
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Bibliographic Info

Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 08-14.

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Length: 28 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:dlw:wpaper:08-14.

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Postal: Purnell Hall, Newark, Delaware 19716
Phone: (302) 831-2565
Fax: (302) 831-6968
Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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Related research

Keywords: online markets; E-commerce; market share; information gatekeeper; equilibrium price dispersion; advertising;

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References

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  1. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
  2. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  3. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion in the Small and in the Large: Evidence from an Internet Price Comparison Site," Working Papers 2004-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  4. Kocas, Cenk & Kiyak, Tunga, 2006. "Theory and evidence on pricing by asymmetric oligopolies," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 83-105, January.
  5. Baye, Michael R. & Kovenock, Dan & de Vries, Casper G., 1992. "It takes two to tango: Equilibria in a model of sales," Games and Economic Behavior, Elsevier, vol. 4(4), pages 493-510, October.
  6. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  7. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-49, October.
  8. Yuxin Chen & Ganesh Iyer & V. Padmanabhan, 2002. "Referral Infomediaries," Marketing Science, INFORMS, vol. 21(4), pages 412-434, May.
  9. Baye, Michael R. & Morgan, John, 2002. "Information gatekeepers and price discrimination on the internet," Economics Letters, Elsevier, vol. 76(1), pages 47-51, June.
  10. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June.
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Cited by:
  1. Jihui Chen & Qihong Liu, 2013. "Information markets, product markets and vertical merger," Journal of Economics and Finance, Springer, vol. 37(1), pages 33-61, January.

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