Advertising and Coordination
When market information such as price is difficult to communicate, consumers and firms may be unable to take advantage of mutually beneficial scale economies so that coordination failures arise. Ostensibly uninformative advertising expenditures can be used to eliminate coordination failures by allowing an efficient firm to communicate implicitly that it offers a low price. This provides a theoretical explanation for L. Benham's (1972) empirical association of the ability to advertise with lower prices and larger scale. Advertising becomes necessary for optimal coordination when the identity of the efficient firm is uncertain. An application to loss-leader pricing is developed. Copyright 1994 by The Review of Economic Studies Limited.
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Volume (Year): 61 (1994)
Issue (Month): 1 (January)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bagwell, Kyle, 1987.
"Introductory Price as a Signal of Cost in a Model of Repeat Business,"
Review of Economic Studies,
Wiley Blackwell, vol. 54(3), pages 365-84, July.
- Kyle Bagwell, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Discussion Papers 722, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Milgrom, Paul & Roberts, John, 1986.
"Price and Advertising Signals of Product Quality,"
Journal of Political Economy,
University of Chicago Press, vol. 94(4), pages 796-821, August.
- Kyle Bagwell & Garey Ramey, 1991.
"Oligopoly Limit Pricing,"
RAND Journal of Economics,
The RAND Corporation, vol. 22(2), pages 155-172, Summer.
- Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
- Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
- Steven A Matthews & Doron Fertig, 1990. "Advertising Signals of Product Quality," Discussion Papers 881, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June.
- Cho, In-Koo & Kreps, David M, 1987.
"Signaling Games and Stable Equilibria,"
The Quarterly Journal of Economics,
MIT Press, vol. 102(2), pages 179-221, May.
- Cady, John F, 1976. "An Estimate of the Price Effects of Restrictions on Drug Price Advertising," Economic Inquiry, Western Economic Association International, vol. 14(4), pages 493-510, December.
- Kyle Bagwell & Garey Ramey, 1990.
"Capacity, Entry and Forward Induction,"
888, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Benham, Lee, 1972. "The Effect of Advertising on the Price of Eyeglasses," Journal of Law and Economics, University of Chicago Press, vol. 15(2), pages 337-52, October.
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