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Pricing, Advertising, and Market Structure with Frictions

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  • Gomis-Porqueras, Pedro
  • Julien, Benoit
  • Wang, Chengsi

Abstract

This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers and uncoordinated buyers. Sellers' search intensity attracts buyers only probabilistically through costly informative advertisement. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed. The model generates an inverted U-shape relationship between individual advertisement and market tightness which is robust to alternative advertising technologies. The well known empirical fact in the IO literature reflects the trade-off between price and market tightness-matching effects. Finally, in this environment we can alleviate the discontinuity problem, allowing for unique symmetric equilibrium price to be derived.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25942.

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Date of creation: 16 Oct 2010
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Handle: RePEc:pra:mprapa:25942

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Keywords: Directed searching; Advertising; Pricing; Market structure;

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  1. George Norman & Lynne Pepall & Dan Richards, 2008. "Generic Product Advertising, Spillovers, and Market Concentration," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(3), pages 719-732.
  2. Raymond Deneckere & James Peck, 1992. "Competition over Price and Service Rate when Demand is Stochastic: A Strategic Analysis," Discussion Papers 990, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  4. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-86, May.
  5. Benjamin Lester, 2011. "Information and Prices with Capacity Constraints," American Economic Review, American Economic Association, vol. 101(4), pages 1591-1600, June.
  6. Julien, B. & Kennes, J. & King, I., 1998. "Bidding for Labour," Discussion Papers dp98-03, Department of Economics, Simon Fraser University.
  7. Schmalensee, Richard., 1987. "Inter-industry studies of structure and performance," Working papers 1874-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September.
  9. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
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