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Coordination Economies

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  • Kyle Bagwell
  • Garey Ramey

Abstract

This paper considers pricing, cost-reducing investment and dissipative advertising by firms when consumers acquire price information via two information channels, observation of advertising and sequential price search. We find that advertising guides consumers to the lowest prices in the market, even when consumers have the option to search. The threat of search by advertising-uninformed consumers introduces price competition among firms, giving short-and long-run resolutions to the Diamond paradox. Higher concentration raises welfare as a consequence of coordination economies. An extension to loss-leader advertising is developed.

Suggested Citation

  • Kyle Bagwell & Garey Ramey, 1995. "Coordination Economies," Discussion Papers 1148, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1148
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    References listed on IDEAS

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    1. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-450, June.
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    Cited by:

    1. Kyle Bagwell, 1991. "Competitive Limit Pricing Under Imperfect Information," Discussion Papers 954, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Jeffrey R. Campbell & Hugo A. Hopenhayn, 2005. "Market Size Matters," Journal of Industrial Economics, Wiley Blackwell, vol. 53(1), pages 1-25, March.
    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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