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Advertising and Collusion in Retails Markets


  • Kyle Bagwell


  • Gea M. Lee


We consider non-price advertising by retail firms that are privately informed as to their respective production costs. We first analyze a static model. We construct an advertising equilibrium, in which informed consumers use an advertising search rule whereby they buy from the highest-advertising firm. Consumers are rational in using the advertising search rule, since the lowest-cost firm advertises the most and also selects the lowest price. Even though the advertising equilibrium facilitates productive efficiency, we establish conditions under which firms enjoy higher expected profit when advertising is banned. Consumer welfare falls in this case, however. We next analyze a dynamic model in which privately informed firms interact repeatedly. In this setting, firms may achieve a collusive equilibrium in which they limit the use of advertising, and we establish conditions under which optimal collusion entails pooling at zero advertising. More generally, full or partial pooling is observed in optimal collusion. In summary, non-price advertising can promote product efficiency and raise consumer welfare; however, firms often have incentive to diminish advertising competition, whether through regulatory restrictions or collusion.

Suggested Citation

  • Kyle Bagwell & Gea M. Lee, 2008. "Advertising and Collusion in Retails Markets," Microeconomics Working Papers 22465, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:microe:22465

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    Cited by:

    1. Lee, Gea M., 2010. "Optimal collusion with internal contracting," Games and Economic Behavior, Elsevier, vol. 68(2), pages 646-669, March.
    2. Condorelli, Daniele, 2012. "What money canʼt buy: Efficient mechanism design with costly signals," Games and Economic Behavior, Elsevier, vol. 75(2), pages 613-624.

    More about this item


    non-price advertising; retail firms; advertising equilibrium;

    JEL classification:

    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis


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