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Pricing, Advertising, and Market Structure with Frictions

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  • Pedro Gomis-Porqueras

    ()
    (School of Economics, Australian National University)

  • Benoit Julien

    ()
    (School of Economics, University of New South Wales)

  • Chengsi Wang

    ()
    (School of Economics, University of New South Wales)

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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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2010-20.pdf
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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2010-20.

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Length: 22 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:swe:wpaper:2010-20

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

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  1. Julien, B. & Kennes, J. & King, I., 1998. "Bidding for Labour," Discussion Papers dp98-03, Department of Economics, Simon Fraser University.
  2. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  3. 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.
  4. 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.
  5. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September.
  6. Benjamin Lester, 2011. "Information and Prices with Capacity Constraints," American Economic Review, American Economic Association, vol. 101(4), pages 1591-1600, June.
  7. Schmalensee, Richard, 1989. "Inter-industry studies of structure and performance," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009 Elsevier.
  8. 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.
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