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Coordination Economies

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Author Info
Kyle Bagwell
Garey Ramey

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Abstract

This paper considers pricing, cost-reducing investment and dissipative advertising by firms when consumers acquire price information via two information channels, observation of advertising and sequential price search. We find that advertising guides consumers to the lowest prices in the market, even when consumers have the option to search. The threat of search by advertising-uninformed consumers introduces price competition among firms, giving short-and long-run resolutions to the Diamond paradox. Higher concentration raises welfare as a consequence of coordination economies. An extension to loss-leader advertising is developed.

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File URL: http://www.kellogg.northwestern.edu/research/math/papers/1148.pdf
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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1148.

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Date of creation: Oct 1995
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Handle: RePEc:nwu:cmsems:1148

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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.:
  1. Kyle Bagwell & Garey Ramey, 1990. "Advertising and Coordination," Discussion Papers 903, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  2. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June. [Downloadable!] (restricted)
  3. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July. [Downloadable!] (restricted)
  4. Bagwell, K. & Ramey, G., 1992. "Coordination Economies, advertising and Search Behavior in Retail Markets," Papers e-92-1, Stanford - Hoover Institution.
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  5. Cady, John F, 1976. "An Estimate of the Price Effects of Restrictions on Drug Price Advertising," Economic Inquiry, Oxford University Press, vol. 14(4), pages 493-510, December.
  6. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August. [Downloadable!] (restricted)
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  7. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September. [Downloadable!] (restricted)
  8. Benham, Lee, 1972. "The Effect of Advertising on the Price of Eyeglasses," Journal of Law & Economics, University of Chicago Press, vol. 15(2), pages 337-52, October.
  9. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June. [Downloadable!] (restricted)
  10. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September. [Downloadable!] (restricted)
  11. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
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  12. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 465-91, October. [Downloadable!] (restricted)
  13. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-94, July. [Downloadable!] (restricted)
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  1. Jeffrey R. Campbell & Hugo Hopenhayn, 2003. "Market size matters," Working Paper Series WP-03-12, Federal Reserve Bank of Chicago. [Downloadable!]
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