Publication Type
Working Paper
Version
publishedVersion
Publication Date
4-2010
Abstract
We consider non-price advertising by retail firms that are privately informed as to their respective production costs. We construct an advertising equilibrium, in which informed consumers use an advertising search rule whereby they buy from the highest-advertising firm. Consumers are rational in using the advertising search rule, since the lowest-cost firm advertises the most and also selects the lowest price. Even though the advertising equilibrium facilitates productive effi ciency, we establish conditions under which firms enjoy higher expected profit when advertising is banned. Consumer welfare falls in this case, however. Under free entry, social surplus is higher when advertising is allowed. In addition, we consider a benchmark model of price competition; we provide comparative-statics results with respect to the number of informed consumers, the number of firms and the distribution of costs; and we consider the possibility of sequential search
Keywords
advertising, regulation, private information, retail markets
Discipline
Advertising and Promotion Management | Industrial Organization
Research Areas
Applied Microeconomics
First Page
1
Last Page
30
Publisher
SMU Economics and Statistics Working Paper Series, No. 04-2010
City or Country
Singapore
Citation
BAGWELL, Kyle and LEE, Gea M..
Advertising Competition in Retail Markets. (2010). 1-30.
Available at: https://ink.library.smu.edu.sg/soe_research/1167
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Comments
Published in BE Journal of Economic Analysis and Policy, 2010, https://doi.org/10.2202/1935-1682.2038