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Costly Buyer Search in Laboratory Markets with Seller Advertising

  • Timothy N. Cason
  • Shakun Datta

In this laboratory experiment sellers simultaneously post prices and choose whether to advertise. Buyers then decide whether to buy from a seller whose advertisement they have received, or engage in costly sequential search to obtain price quotes from other sellers. In the unique symmetric equilibrium, sellers either charge a high unadvertised price or randomize in an interval of lower advertised prices. Increases in either search or advertising costs raise equilibrium prices, and equilibrium advertising intensity decreases with lower search costs and higher advertising costs. Our results are consistent with most of these comparative static predictions, and sellers also post lower advertised than unadvertised prices as predicted. In all treatments, however, sellers price much lower than the equilibrium interval and earn very low profits. Although buyers’ search decisions are approximately optimal, sellers advertise more intensely than predicted. Consequently, market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium that features significant seller market power.

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Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1212.

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Length: 40 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:pur:prukra:1212
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