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Advertising and Coordination

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Author Info
Kyle Bagwell
Garey Ramey

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Abstract

We show that when relevant market information such as price is difficult to communicate, advertising plays a key role in bringing about optimal coordination of purchase behavior: an efficient firm uses advertising expenditures in place of price to inform sophisticated consumers that it offers a better deal. This provides a theoretical explanation for Benham's (1972) empirical association of the ability to advertise with lower prices and larger scale. We find that advertising improves welfare unambiguously when firms' price choices are the only source of uncertainty. When advertising must also signal the identity of the efficient firm, however, a welfare tradeoff arises between advertising and coordination. Our results extend readily to situations of partial price observability and product quality uncertainty.

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File URL: http://www.kellogg.northwestern.edu/research/math/papers/903.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 903.

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Date of creation: Aug 1990
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Handle: RePEc:nwu:cmsems:903

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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. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr. [Downloadable!] (restricted)
  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. Bagwell, Kyle, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Review of Economic Studies, Blackwell Publishing, vol. 54(3), pages 365-84, July. [Downloadable!] (restricted)
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  4. Kyle Bagwell & Garey Ramey, 1989. "Oligopoly Limit Pricing," Discussion Papers 829, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  5. Kyle Bagwell & Garey Ramey, 1990. "Capacity, Entry and Forward Induction," Discussion Papers 888, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  6. 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.
  7. Steven A Matthews & Doron Fertig, 1990. "Advertising Signals of Product Quality," Discussion Papers 881, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  8. 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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  9. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May. [Downloadable!] (restricted)
  10. 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.
  11. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August. [Downloadable!] (restricted)
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Cited by:
(explanations, 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. Draganska, Michaela & Klapper, Daniel & Villas-Boas, Sofia B., 2007. "Determinants of Margins in the Distribution Channel: An Empirical Investigation," Research Papers 1959, Stanford University, Graduate School of Business. [Downloadable!]
  2. Ulrich Doraszelski & Sarit Markovich, 2004. "Advertising Dynamics and Competitive Advantage," Computing in Economics and Finance 2004 61, Society for Computational Economics. [Downloadable!]
  3. Jeffrey Milyo & Joel Waldfogel, 1998. "The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart," Discussion Papers Series, Department of Economics, Tufts University 9807, Department of Economics, Tufts University. [Downloadable!]
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  4. Junichiro Ishida, 2004. "Education as advertisement," Economics Bulletin, Economics Bulletin, vol. 10(8), pages 1-8. [Downloadable!]
  5. Pastine, Ivan & Pastine, Tuvana, 2001. "Consumption Externalities, Coordination and Advertising," CEPR Discussion Papers 2867, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Pedro Pereira, 2004. "Some implications of search and switching costs for the price dynamics of electronic markets," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 11(3), pages 303-327, November. [Downloadable!] (restricted)
  7. Pastine, Ivan & Pastine, Tuvana, 2005. "Coordination in Markets with Consumption Externalities: The Role of Advertising and Product Quality," CEPR Discussion Papers 5152, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Simbanegavi, Witness, 2008. "Loss leader or low margin leader? Advertising and the degree of product differentiation," MPRA Paper 9694, University Library of Munich, Germany. [Downloadable!]
  9. Kyle Bagwell & Garey Ramey, 1992. "Coordination Economies," Discussion Papers 1034, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
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