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Random Advertising and Monopolistic Price Dispersion

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  • Helmut Bester

Abstract

We investigate the role of price advertising in a market where consumers are imperfectly informed about prices. We consider a monopolist whose demand depends on price and advertising expenditure. This demand function is derived from optimizing behavior of consumers. Uninformed consumers may pay a cost to visit the seller and obtain price information. Advertising enables the monopolist to increase the number of informed consumers. In equilibrium the uninformed consumers form rational price expectations, and the seller necessarily adopts a random pricing and advertising strategy.

Suggested Citation

  • Helmut Bester, 1994. "Random Advertising and Monopolistic Price Dispersion," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(3), pages 545-559, September.
    • Handle: RePEc:bla:jemstr:v:3:y:1994:i:3:p:545-559
    DOI: 10.1111/j.1430-9134.1994.00545.x
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    1. Stiglitz, J E, 1979. "Equilibrium in Product Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 69(2), pages 339-345, May.
    2. Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 63-81.
    3. Bester, H. & Petrakis, E., 1992. "Price Advertising and Advertising in Oligopoly," Discussion Paper 1992-22, Tilburg University, Center for Economic Research.
    4. Bester, H., 1991. "A Model of price Advertising and Sales," Papers 9158, Tilburg - Center for Economic Research.
    5. Steven Salop, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 393-406.
    6. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 465-491.
    7. 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.
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    Cited by:

    1. Strausz Roland, 2007. "Regulating Availability with Demand Uncertainty," German Economic Review, De Gruyter, vol. 8(1), pages 107-121, February.
    2. Bester, Helmut & Petrakis, Emmanuel, 1995. "Price competition and advertising in oligopoly," European Economic Review, Elsevier, vol. 39(6), pages 1075-1088, June.
    3. Rhodes, Andrew, 2011. "Multiproduct pricing and the Diamond Paradox," MPRA Paper 32511, University Library of Munich, Germany.
    4. David Paton, 1998. "Who A dvertises Prices? A Firm Level Study Based on Survey Data," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 5(1), pages 57-75.
    5. Cason, Timothy N. & Datta, Shakun, 2006. "An experimental study of price dispersion in an optimal search model with advertising," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 639-665, May.

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