Advertising Competition in Retail Markets
AbstractWe consider non-price advertising by retail firms that are privately informed as to their respective production costs. We construct an advertising equilibrium, in which informed consumers use an advertising search rule whereby they buy from the highest-advertising firm. Consumers are rational in using the advertising search rule, since the lowest-cost firm advertises the most and also selects the lowest price. Even though the advertising equilibrium facilitates productive efficiency, we establish conditions under which firms enjoy higher expected profit when advertising is banned. Consumer welfare falls in this case, however. Under free entry, social surplus is higher when advertising is allowed. In addition, we consider a benchmark model of price competition; we provide comparative-statics results with respect to the number of informed consumers, the number of firms and the distribution of costs; and we consider the possibility of sequential search.
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Bibliographic InfoPaper provided by Singapore Management University, School of Economics in its series Working Papers with number 04-2010.
Date of creation: Apr 2010
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Other versions of this item:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-17 (All new papers)
- NEP-COM-2010-07-17 (Industrial Competition)
- NEP-IND-2010-07-17 (Industrial Organization)
- NEP-MIC-2010-07-17 (Microeconomics)
- NEP-MKT-2010-07-17 (Marketing)
- NEP-SEA-2010-07-17 (South East Asia)
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