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Limited Information and Advertising in the U.S. Personal Computer Industry

  • Michelle Sovinsky Goeree

Traditional discrete-choice models assume buyers are aware of all products for sale. In markets where products change rapidly, the full information assumption is untenable. I present a discrete-choice model of limited consumer information, where advertising influences the set of products from which consumers choose to purchase. I apply the model to the U.S. personal computer market where top firms spend over $2 billion annually on advertising. I find estimated markups of 19% over production costs, where top firms advertise more than average and earn higher than average markups. High markups are explained to a large extent by informational asymmetries across consumers, where full information models predict markups of one-fourth the magnitude. I find that estimated product demand curves are biased toward being too elastic under traditional models. I show how to use data on media exposure to improve estimated price elasticities in the absence of micro ad data. Copyright 2008 The Econometric Society.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 76 (2008)
Issue (Month): 5 (09)
Pages: 1017-1074

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Handle: RePEc:ecm:emetrp:v:76:y:2008:i:5:p:1017-1074
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