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Advertising intensity and welfare in an equilibrium search model

Listed author(s):
  • McCarthy, Ian M.

I analyze an equilibrium search model in a duopoly setting with bilateral heterogeneities in production and search costs in which firms can advertise by announcing price. I compare the market advertising level to the socially optimal level, where I find that costly search can improve welfare and that firms may under- or over-advertise relative to the social optimum depending on the costs of search. The results suggest that, in markets with sufficiently low search costs, firms are likely over-advertising relative to the socially optimal level, and vice versa for markets with sufficiently high search costs.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165176516300064
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 141 (2016)
Issue (Month): C ()
Pages: 20-26

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Handle: RePEc:eee:ecolet:v:141:y:2016:i:c:p:20-26
DOI: 10.1016/j.econlet.2016.01.022
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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