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Expanding Demand through Price Advertisement

  • Michael Sandfort

    (U.S. Department of Justice)

  • Hideo Konishi

    ()

    (Boston College)

Price advertisement by retail stores is pervasive. If there exist non-negligible costs of consumer search, a retailer can increase the number of consumers visiting its location by advertising a low price, thus increasing consumers' expected utilities from search. If the increase in the number of consumers who visit the store is substantial, then the store's profit goes up even though low prices decrease profit margins. We show that this intuition extends to the case of a multi-product monopolist, who may choose to advertise very low prices for a limited number of items it carries, even when advertised and non-advertised commodities are substitutes. Finally, we analyze a retail duopoly in which both stores sell from the same location, showing that under some circumstances, there is an incentive for one of the retailers to free-ride on the other's advertisement.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 453.

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Length: 29 pages
Date of creation: 20 Jan 2000
Date of revision: 21 Jun 2001
Publication status: Published, International Journal of Industrial Organization, 20, 965-994, 2002.
Handle: RePEc:boc:bocoec:453
Note: Previously circulated as Price Advertisement by Retail Stores: A Commitment Device
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