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Brand and Price Advertising in Online Markets

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  • Baye, Michael
  • Morgan, John

Abstract

We model a homogeneous product environment where identical e-retailers endogenously engage in both brand advertising (to create loyal customers) and price advertising (to attract "shoppers"). Our analysis allows for "cross-channel" effects; indeed, we show that price advertising is a substitute for brand advertising. In contrast to models where loyalty is exogenous, these cross-channel effects lead to a continuum of symmetric equilibria; however, the set of equilibria converges to a unique equilibrium as the number of potential e-retailers grows arbitrarily large. Price dispersion is a key feature of all of these equilibria, including the limit equilibrium. While each firm finds it optimal to advertise its brand in an attempt to "grow" its base of loyal customers, in equilibrium, branding (1) reduces firm profits, (2) increases prices paid by loyals and shoppers, and (3) adversely affects gatekeepers operating price comparison sites. Branding also tightens the range of prices and reduces the value of the price information provided by a comparison site. Using data from a price comparison site, we test several predictions of the model.

Suggested Citation

  • Baye, Michael & Morgan, John, 2004. "Brand and Price Advertising in Online Markets," Competition Policy Center, Working Paper Series qt9760k3hz, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  • Handle: RePEc:cdl:compol:qt9760k3hz
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    Cited by:

    1. Kai A.Konrad, 2010. "Merger Profitability in Industries with Brand Portfolios and Loyal Customers," Korean Economic Review, Korean Economic Association, vol. 26, pages 5-26.
    2. De los Santos, Babur, 2018. "Consumer search on the Internet," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 66-105.
    3. Chioveanu, Ioana, 2008. "Advertising, brand loyalty and pricing," Games and Economic Behavior, Elsevier, vol. 64(1), pages 68-80, September.
    4. Häring, Julia, 2005. "The Virtual Location of E-Tailers: Evidence from a B2C E-Commerce Market," ZEW Discussion Papers 05-52, ZEW - Leibniz Centre for European Economic Research.
    5. Balachander Subramanian & Kannan Karthik & Schwartz David G, 2009. "A Theoretical and Empirical Analysis of Alternate Auction Policies for Search Advertisements," Review of Marketing Science, De Gruyter, vol. 7(1), pages 1-51, December.

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    More about this item

    Keywords

    Price dispersion;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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