Michael R. Baye (Department of Business Economics and Public Policy, Indiana University Kelley School of Business) John Morgan (University of California at Berkeley)
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We model a homogeneous product environment where identical e-retailers endogenously engage in both brand advertising (to create loyal customers) and price advertising (to attract "shoppers"). Our analysis allows for "cross-channel" effects; indeed, we show that price advertising is a substitute for brand advertising. In contrast to models where loyalty is exogenous, these cross-channel effects lead to a continuum of symmetric equilibria; however, the set of equilibria converges to a 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. While each firm finds it optimal to advertise its brand in an attempt to "grow" its base of loyal customers, in equilibrium, branding (1) reduces firm profits, (2) increases prices paid by loyals and shoppers, and (3) adversely affects gatekeepers operating price comparison sites. Branding also tightens the range of prices and reduces the value of the price information provided by a comparison site. Using data from a price comparison site, we test several predictions of the model.
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Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number
2005-08.
Find related papers by JEL classification: D4 - Microeconomics - - Market Structure and Pricing D8 - Microeconomics - - Information, Knowledge, and Uncertainty M3 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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.:
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[Downloadable!] (restricted)
Morton, Fiona Scott & Zettelmeyer, Florian & Silva-Risso, Jorge, 2001.
"Internet Car Retailing,"
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[Downloadable!] (restricted)
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.
[Downloadable!]
Dana, James D, Jr, 1994.
"Learning in an Equilibrium Search Model,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 745-71, August.
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