Advertising, Pricing & Market Structure in Competitive Matching Markets
AbstractThis paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers. Sellers' expenditure on directly informative advertising attracts consumers only probabilistically. Consumers who happen to observe advertisements randomize over the advertised sellers using symmetric mixed strategies. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed, including the interplay of prices and advertising with the market structure. The model generates a unimodal (inverted U-shape) relationship between both, individual and industry advertising level, and market structure. The relationship results from a trade off between a price effect and a market structure-matching effect. We find that the decentralized market has underprovision of advertising, both for individual sellers and industry wide, and that entry is excessive relative to the efficient level. We present a quantitative analysis to highlight properties of the models and to demonstrate the extent of inefficiency.
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Bibliographic InfoPaper provided by EconWPA in its series Industrial Organization with number 0511008.
Length: 34 pages
Date of creation: 15 Nov 2005
Date of revision:
Note: Type of Document - pdf; pages: 34
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Advertising; pricing; market structure; endogenous matching; asymmetric information; efficiency.;
Find related papers by JEL classification:
- B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-19 (All new papers)
- NEP-COM-2005-11-19 (Industrial Competition)
- NEP-GTH-2005-11-19 (Game Theory)
- NEP-IND-2005-11-19 (Industrial Organization)
- NEP-MIC-2005-11-19 (Microeconomics)
- NEP-MKT-2005-11-19 (Marketing)
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