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Advertising, Pricing & Market Structure in Competitive Matching Markets

Author

Listed:
  • Edner Bataille

    (California State University-Bakersfield)

  • Benoit Julien

    (Australian Graduate School of Management, University of New South Wales)

Abstract

This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers. Sellers' expenditure on directly informative advertising attracts consumers only probabilistically. Consumers who happen to observe advertisements randomize over the advertised sellers using symmetric mixed strategies. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed, including the interplay of prices and advertising with the market structure. The model generates a unimodal (inverted U-shape) relationship between both, individual and industry advertising level, and market structure. The relationship results from a trade off between a price effect and a market structure-matching effect. We find that the decentralized market has underprovision of advertising, both for individual sellers and industry wide, and that entry is excessive relative to the efficient level. We present a quantitative analysis to highlight properties of the models and to demonstrate the extent of inefficiency.

Suggested Citation

  • Edner Bataille & Benoit Julien, 2005. "Advertising, Pricing & Market Structure in Competitive Matching Markets," Industrial Organization 0511008, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpio:0511008
    Note: Type of Document - pdf; pages: 34
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/io/papers/0511/0511008.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Buxton, A J & Davies, S W & Lyons, B R, 1984. "Concentration and Advertising in Consumer and Producer Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 32(4), pages 451-464, June.
    3. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-1454, September.
    4. 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.
    5. Benoit Julien & John Kennes & Ian King, 2000. "Bidding for Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 619-649, October.
    6. Sutton, C J, 1974. "Advertising, Concentration and Competition," Economic Journal, Royal Economic Society, vol. 84(333), pages 56-69, March.
    7. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
    8. Haas-Wilson, Deborah, 1986. "The Effect of Commercial Practice Restrictions: The Case of Optometry," Journal of Law and Economics, University of Chicago Press, vol. 29(1), pages 165-186, April.
    9. McAfee R. Preston, 1994. "Endogenous Availability, Cartels, and Merger in an Equilibrium Price Dispersion," Journal of Economic Theory, Elsevier, vol. 62(1), pages 24-47, February.
    10. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
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    12. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-686, May.
    13. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October.
    14. Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, Elsevier.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Advertising; pricing; market structure; endogenous matching; asymmetric information; efficiency.;

    JEL classification:

    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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