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Costly Buyer Search in Laboratory Markets with Seller Advertising

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  • Timothy N. Cason
  • Shakun Datta

Abstract

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.

Suggested Citation

  • Timothy N. Cason & Shakun Datta, 2008. "Costly Buyer Search in Laboratory Markets with Seller Advertising," Purdue University Economics Working Papers 1212, Purdue University, Department of Economics.
  • Handle: RePEc:pur:prukra:1212
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    File URL: http://www.krannert.purdue.edu/programs/phd/Working-papers-series/2008/1212.pdf
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    References listed on IDEAS

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    Cited by:

    1. Bayer, Ralph-C. & Ke, Changxia, 2013. "Discounts and consumer search behavior: The role of framing," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 215-224.
    2. Aurora García-Gallego & Nikolaos Georgantzís & Pedro Pereira & José C. Pernías-Cerrillo, 2005. "Competing Against Simulated Equilibrium Price Dispersions: An Experiment On Internet-Assisted Search Markets," Working Papers 05-12, NET Institute.
    3. Cason, Timothy N. & Datta, Shakun, 2006. "An experimental study of price dispersion in an optimal search model with advertising," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 639-665, May.

    More about this item

    Keywords

    Experiment; Posted offer; Market power; Mixed strategy; Uncertainty; Shopping;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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