We consider non-price advertising by retail …rms that are privately informed as to their respective production costs. We …rst analyze a static model. We construct an advertising equi- librium, in which informed consumers use an advertising search rule whereby they buy from the highest-advertising …rm. Consumers are rational in using the advertising search rule, since the lowest-cost …rm advertises the most and also selects the lowest price. Even though the advertis- ing equilibrium facilitates productive e¢ ciency, we establish conditions under which …rms enjoy higher expected pro…t when advertising is banned. Consumer welfare falls in this case, however. We next analyze a dynamic model in which privately informed …rms interact repeatedly. In this setting, …rms may achieve a collusive equilibrium in which they limit the use of advertising, and we establish conditions under which optimal collusion entails pooling at zero advertising. More generally, full or partial pooling is observed in optimal collusion. In summary, non-price advertising can promote product e¢ ciency and raise consumer welfare; however, …rms often have incentive to diminish advertising competition, whether through regulatory restrictions or collusion.
advertising, collusion, private information, retail markets
Advertising and Promotion Management | Econometrics | Industrial Organization
Bagwell, Kyle and LEE, Gea Myoung.
Advertising and Collusion in Retail Markets. (2008). 9-2008, 1-52. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/1112
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