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Advertising intensity and welfare in an equilibrium search model

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  • McCarthy, Ian M.

Abstract

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.

Suggested Citation

  • McCarthy, Ian M., 2016. "Advertising intensity and welfare in an equilibrium search model," Economics Letters, Elsevier, vol. 141(C), pages 20-26.
  • Handle: RePEc:eee:ecolet:v:141:y:2016:i:c:p:20-26
    DOI: 10.1016/j.econlet.2016.01.022
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    References listed on IDEAS

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    Cited by:

    1. Ian McCarthy, 2008. "Simulating Sequential Search Models with Genetic Algorithms: Analysis of Price Ceilings, Taxes, Advertising and Welfare," Caepr Working Papers 2008-010, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

    More about this item

    Keywords

    Search; Advertising; Welfare;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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