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Asymmetric Market Shares, Advertising, and Pricing: Equilibrium with an Information Gatekeeper

Author

Listed:
  • Michael A. Arnold

    () (Department of Economics,University of Delaware)

  • Chenguang Li

    (Indiana University)

  • Christine Saliba

    (University of Delaware)

  • Lan Zhang

    (Indiana University)

Abstract

We analyze the impact of market share on advertising and pricing decisions by firms that sell to loyal, non-shopping customers and can advertise to shoppers through an information intermediary or "gatekeeper." In equilibrium the firm with the smaller loyal market advertises more aggressively but prices less competitively than the firm with the larger loyal market, and there is no equilibrium in which both firms advertise with probability 1. The results differ significantly from earlier literature which assumes all prices are revealed to shoppers and finds that the firm with the smaller loyal market adopts a more competitive pricing strategy. The predictions of the model are consistent with advertising and pricing behavior observed on price comparison websites such as Shopper.com.

Suggested Citation

  • Michael A. Arnold & Chenguang Li & Christine Saliba & Lan Zhang, 2008. "Asymmetric Market Shares, Advertising, and Pricing: Equilibrium with an Information Gatekeeper," Working Papers 08-14, University of Delaware, Department of Economics.
    • Handle: RePEc:dlw:wpaper:08-14.
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    References listed on IDEAS

    as
    1. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion In The Small And In The Large: Evidence From An Internet Price Comparison Site," Journal of Industrial Economics, Wiley Blackwell, vol. 52(4), pages 463-496, December.
    2. Baye, Michael R. & Kovenock, Dan & de Vries, Casper G., 1992. "It takes two to tango: Equilibria in a model of sales," Games and Economic Behavior, Elsevier, vol. 4(4), pages 493-510, October.
    3. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    4. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    5. Yuxin Chen & Ganesh Iyer & V. Padmanabhan, 2002. "Referral Infomediaries," Marketing Science, INFORMS, vol. 21(4), pages 412-434, May.
    6. Kocas, Cenk & Kiyak, Tunga, 2006. "Theory and evidence on pricing by asymmetric oligopolies," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 83-105, January.
    7. 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.
    8. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-449, October.
    9. Baye, Michael R. & Morgan, John, 2002. "Information gatekeepers and price discrimination on the internet," Economics Letters, Elsevier, vol. 76(1), pages 47-51, June.
    10. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213-213.
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    Citations

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    Cited by:

    1. Ronayne, David, 2015. "Price Comparison Websites," The Warwick Economics Research Paper Series (TWERPS) 1056, University of Warwick, Department of Economics.
    2. Shelegia, Sandro & Wilson, Chris, 2016. "A Generalized Model of Sales," EconStor Preprints 147411, ZBW - German National Library of Economics.
    3. repec:bpj:rneart:v:15:y:2017:i:1:p:1-34:n:1 is not listed on IDEAS
    4. Jihui Chen & Qihong Liu, 2013. "Information markets, product markets and vertical merger," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(1), pages 33-61, January.

    More about this item

    Keywords

    online markets; E-commerce; market share; information gatekeeper; equilibrium price dispersion; advertising;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L19 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Other
    • L89 - Industrial Organization - - Industry Studies: Services - - - Other

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