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Informative Advertising, Consumer Search and Transparency Policy

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  • Wang, Chengsi

Abstract

Information about a new or non-frequently purchased product is often produced by both sides of the market. We construct a monopoly pricing model consisting of both seller's information disclosure and consumer's information acquisition. The presence of consumer search, which lowers the probability of making sales, creates incentive for the monopolist to deter search. In contrast with most previous literature, we show that, partial information disclosure arises in equilibrium when the search cost is low. As the search cost increases to medium level, the monopolist hides information but lowers the price to prevent consumers from searching. When the search cost is very high, the monopolist charges high price and hides all information. The equilibrium price is thus non-monotonic in search cost. Information disclosure and consumer search co-exist only when the search cost is low, and thus complement each other. We show that transparency policies on advertising cannot improve social welfare. Nevertheless, they benefit consumers in a wide range of values of the search costs by improving matching quality and reducing the expense of searching. But for some medium levels of search costs, transparency policies hurt consumers due to the induced high price in equilibrium.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34977.

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Date of creation: 03 Oct 2011
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Handle: RePEc:pra:mprapa:34977

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Keywords: Monopoly Pricing; Information Disclosure; Information Acquisition; Search Cost; Transparency Policy;

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References

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  1. Heski Bar-Isaac & Guillermo Caruana & Vicente Cunat, 2008. "Information Gathering and Marketing," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 08-17, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Wolinsky, Asher, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(3), pages 493-511, August.
  3. Anderson, Simon P & Renault, Regis, 2000. "Consumer Information and Firm Pricing: Negative Externalities from Improved Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 721-42, August.
  4. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-27, May.
  5. Anderson, Simon P & Renault, Régis, 2005. "Advertising Content," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5064, C.E.P.R. Discussion Papers.
  6. Justin P. Johnson & David P. Myatt, 2006. "On the Simple Economics of Advertising, Marketing, and Product Design," American Economic Review, American Economic Association, American Economic Association, vol. 96(3), pages 756-784, June.
  7. Heski Bar-Isaac & Guillermo Caruana & Vicente Cunat, 2012. "Search, Design, and Market Structure," American Economic Review, American Economic Association, American Economic Association, vol. 102(2), pages 1140-60, April.
  8. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  9. Maarten C.W. Janssen & Mariëlle C. Non, 2005. "Advertising and Consumer Search in a Duopoly Model," Tinbergen Institute Discussion Papers 05-022/1, Tinbergen Institute.
  10. Ivanov, Maxim, 2009. "Niche market or mass market?," Economics Letters, Elsevier, Elsevier, vol. 105(3), pages 217-220, December.
  11. Maarten C. W. Janssen & Marielle C. Non, 2009. "Going Where the Ad Leads You: On High Advertised Prices and Searching Where to Buy," Marketing Science, INFORMS, INFORMS, vol. 28(1), pages 87-98, 01-02.
  12. Dirk Bergemann & Juuso Vaimaki, 2000. "Information Acquisition and Efficient Mechanism Design," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1248, Cowles Foundation for Research in Economics, Yale University.
  13. Juan-JosÈ Ganuza & JosÈ S. Penalva, 2010. "Signal Orderings Based on Dispersion and the Supply of Private Information in Auctions," Econometrica, Econometric Society, Econometric Society, vol. 78(3), pages 1007-1030, 05.
  14. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, Econometric Society, vol. 61(3), pages 657-86, May.
  15. Maarten C.W. Janssen & Marielle C. Non, 2006. "Going where the Ad leads you: On High Advertised Prices and Search where to buy," Tinbergen Institute Discussion Papers 06-075/1, Tinbergen Institute.
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Cited by:
  1. Giovanni Ursino & Salvatore Piccolo & Piero Tedeschi, 2013. "Deceptive Advertising with Rational Buyers," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 348, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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