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Coordination Economies

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  • Kyle Bagwell
  • Garey Ramey

Abstract

We introduce a model of the retail firm in which consumers and active firms benefit collectively from coordination of sales at fewer firms. Using this model, we show that ostensibly uninformative advertising plays a key role in bringing about coordination economies, by directing consumer search toward firms taht offer the best deals. Optimal consumer scarch takes the form of a simple rule of thumb that uses observed advertising information to guide search. Both industry concentration and social surplus are higher in the presence of advertising, relative to a no-advertising benchmark.

Suggested Citation

  • Kyle Bagwell & Garey Ramey, 1992. "Coordination Economies," Discussion Papers 1034, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1034
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    References listed on IDEAS

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    6. Kyle Bagwell & Garey Ramey, 1994. "Advertising and Coordination," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 153-171.
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    Cited by:

    1. Jeffrey R. Campbell & Hugo A. Hopenhayn, 2005. "Market Size Matters," Journal of Industrial Economics, Wiley Blackwell, vol. 53(1), pages 1-25, March.
    2. Kyle Bagwell, 1991. "Competitive Limit Pricing Under Imperfect Information," Discussion Papers 954, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Rabah Amir, 2005. "Supermodularity and Complementarity in Economics: An Elementary Survey," Southern Economic Journal, John Wiley & Sons, vol. 71(3), pages 636-660, January.

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