Publication Type

Journal Article

Version

publishedVersion

Publication Date

8-2010

Abstract

We analyze non-price advertising by retail firms, when the firms are privately informed about their respective costs of production. In a static advertising game, an advertising equilibrium exists in which lower-cost firms select higher advertising levels. In this equilibrium, informed consumers rationally employ an advertising search rule in which they buy from the highest-advertising firm since lower-cost firms also select lower prices. In a repeated advertising game, colluding firms face a trade-off: the use of advertising can promote productive efficiency, but only if sufficient current or future advertising expenses are incurred. At one extreme, if firms pool at zero advertising, they sacrifice productive efficiency but also eliminate current and future advertising expenses. Focusing on symmetric perfect public equilibria for the repeated advertising game, we establish conditions under which optimal collusion entails pooling at zero advertising. More generally, full or partial pooling is observed in optimal collusion. Such collusive agreements reduce consumer welfare, since they restrict informed consumers' ability to locate the lowest available price in the market.

Keywords

advertising, collusion, private information, retail markets

Discipline

Advertising and Promotion Management | Behavioral Economics | Industrial Organization

Research Areas

Applied Microeconomics

Publication

B.E. Journal of Economic Analysis and Policy

Volume

10

Issue

1

First Page

1

Last Page

53

ISSN

1935-1682

Identifier

10.2202/1935-1682.2489

Publisher

De Gruyter

Additional URL

https://doi.org/10.2202/1935-1682.2489

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