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Pricing, Advertising, and Market Structure with Frictions

Author

Listed:
  • Pedro Gomis-Porqueras

    (School of Economics, Australian National University)

  • Benoit Julien

    (School of Economics, University of New South Wales)

  • Chengsi Wang

    (School of Economics, University of New South Wales)

Abstract

This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers and uncoordinated buyers. Sellers’ search intensity attracts buyers only probabilistically through costly informative advertisement. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed. The model generates an inverted U-shape relationship between individual advertisement and market tightness which is robust to alternative advertising technologies. The well known empirical fact in the IO literature reflects the trade-off between price and market tightness matching effects. Finally, in this environment we can alleviate the discontinuity problem, allowing for unique symmetric equilibrium price to be derived.

Suggested Citation

  • Pedro Gomis-Porqueras & Benoit Julien & Chengsi Wang, 2010. "Pricing, Advertising, and Market Structure with Frictions," Discussion Papers 2010-20, School of Economics, The University of New South Wales.
  • Handle: RePEc:swe:wpaper:2010-20
    as

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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2010-20.pdf
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    References listed on IDEAS

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    1. Raymond Deneckere & James Peck, 1995. "Competition Over Price and Service Rate When Demand is Stochastic: A Strategic Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 148-162, Spring.
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    4. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
    5. Benjamin Lester, 2011. "Information and Prices with Capacity Constraints," American Economic Review, American Economic Association, vol. 101(4), pages 1591-1600, June.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Directed searching; Advertising; Pricing; Market structure;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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