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Existence Advertising, Price Competition, and Asymmetric Market Structure

  • Ian MacDonald
  • Laura Meriluoto

We examine a duopoly pricing game where some customers know of no firms, others know of only one firm, and some know of both firms. Firms have constant and identical marginal costs, sell homogenous goods and choose prices simultaneously. Customers observe the prices of the firms that are known to them. We show that there is no equilibrium in pure price strategies for this game. We find a mixed strategy equilibrium, and show that it has intuitively appealing comparative static properties. We then examine the two stage game in which firms advertise their existence in stage 1 to create their customer bases, and in stage 2 play the pricing game described above. The equilibrium to the two stage game is asymmetric, and far from the Bertrand equilibrium.

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Paper provided by Department of Economics, University of Calgary in its series Working Papers with number 2008-10.

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Date of creation: 01 Feb 2008
Date of revision: 13 Feb 2008
Handle: RePEc:clg:wpaper:2008-10
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  1. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-49, October.
  2. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  3. Rothschild, Michael, 1973. "Models of Market Organization with Imperfect Information: A Survey," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1283-1308, Nov.-Dec..
  4. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Entry (and exit) in a differentiated industry," CORE Discussion Papers RP -400, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Stiglitz, Joseph E., 1989. "Imperfect information in the product market," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 13, pages 769-847 Elsevier.
  6. Saul Lach, 2002. "Existence And Persistence Of Price Dispersion: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 433-444, August.
  7. Gabszewicz, Jean Jaskold & Thisse, Jacques-Francois, 1986. "On the Nature of Competition with Differentiated Products," Economic Journal, Royal Economic Society, vol. 96(381), pages 160-72, March.
  8. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  9. Bester, Helmut & Petrakis, Emmanuel, 1995. "Price competition and advertising in oligopoly," European Economic Review, Elsevier, vol. 39(6), pages 1075-1088, June.
  10. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion in the Small and in the Large: Evidence from an Internet Price Comparison Site," Working Papers 2004-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  11. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August.
  12. Pratt, John W & Wise, David A & Zeckhauser, Richard, 1979. "Price Differences in Almost Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 93(2), pages 189-211, May.
  13. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June.
  14. 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.
  15. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
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