Publication Type

Working Paper

Publication Date

3-2008

Abstract

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.

Keywords

advertising, collusion, private information, retail markets

Discipline

Advertising and Promotion Management | Econometrics | Industrial Organization

Research Areas

Applied Microeconomics

Volume

9-2008

First Page

1

Last Page

52

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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