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Informative advertising by heterogeneous firms

  • Dinlersoz, Emin M.
  • Yorukoglu, Mehmet

This paper introduces a model to analyze the role of the cost of information dissemination in large markets where firms have varying degrees of intrinsic efficiency reflected in their marginal costs. Firms enter a market and discover how efficient they are. Those firms with high enough efficiency stay, others exit. Remaining firms then compete to attract consumers by disseminating information about their existence and their prices using a common advertising technology. The properties of the model's equilibrium are analyzed. The model is then used to study the effect of the cost of information dissemination on the competitiveness of the market and key industry aggregates, such as price distribution and the distribution of firm value.

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Article provided by Elsevier in its journal Information Economics and Policy.

Volume (Year): 20 (2008)
Issue (Month): 2 (June)
Pages: 168-191

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Handle: RePEc:eee:iepoli:v:20:y:2008:i:2:p:168-191
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505549

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  1. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  2. Wilde, Louis L & Schwartz, Alan, 1979. "Equilibrium Comparison Shopping," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 543-53, July.
  3. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
  4. Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-23, March.
  5. Ireland, Norman J, 1993. "The Provision of Information in a Bertrand Oligopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 41(1), pages 61-76, March.
  6. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
  7. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  8. Emin M. Dinlersoz & Mehmet Yorukoglu, 2012. "Information and Industry Dynamics," American Economic Review, American Economic Association, vol. 102(2), pages 884-913, April.
  9. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-86, May.
  10. Jennifer F. Reinganum, 1978. "A Simple Model of Equilibrium Price Dispersion," Discussion Papers 335, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February.
  12. Brown, Jeffrey, 2000. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Working Paper Series rwp00-007, Harvard University, John F. Kennedy School of Government.
  13. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October.
  14. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
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