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An equilibrium model of advertising, production and exchange

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  • Kjell Hausken

Abstract

An equilibrium model of advertising, production and exchange is developed. Sellers advertise and produce. In contrast to models where one side is often kept to its reservation value, both sides of the exchange are made worse off due to distortive advertising. Buyers read advertising, screen for quality of each good, choose prices optimally and provide a numeraire good (or money) in exchange. The total numbers of sellers of the two types determine the total production. The total number of buyers determines the total presence of the numeraire good. An advertising attention function adjusts how buyers pay attention to advertising. The competitiveness of the market plays a role. Advertising causes scarcity of goods which causes a price effect which is adjusted for. Search costs for choosiness are introduced for buyers screening for quality, which reduces the amount of the numeraire good held by buyers, causing less to be provided to sellers.

Suggested Citation

  • Kjell Hausken, 2011. "An equilibrium model of advertising, production and exchange," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 3(4), pages 407-442.
  • Handle: RePEc:ids:ijecbr:v:3:y:2011:i:4:p:407-442
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