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Advertising and Coordination

Author

Listed:
  • Kyle Bagwell
  • Garey Ramey

Abstract

When market information such as price is difficult to communicate, consumers and firms may be unable to take advantage of mutually beneficial scale economies, so that coordination failures arise. Ostensibly uninformative advertising expenditures can be used to eliminate coordination failures, by allowing an efficient firm to communicate implicitly that it offers a low price. This provides a theoretical explanation for Benham's (1972) empirical association of the ability to advertise with lower prices and larger scale. Advertising becomes necessary for optimal coordination when the identity of the efficient firm is uncertain. An application to loss-leader pricing is developed.

Suggested Citation

  • Kyle Bagwell & Garey Ramey, 1994. "Advertising and Coordination," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(1), pages 153-171.
    • Handle: RePEc:oup:restud:v:61:y:1994:i:1:p:153-171.
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    File URL: http://hdl.handle.net/10.2307/2297881
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