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Advertising Competition in Retail Markets

Author

Listed:
  • Bagwell Kyle

    (Stanford University)

  • Lee Gea M

    (Singapore Management University)

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 efficiency, 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.

Suggested Citation

  • Bagwell Kyle & Lee Gea M, 2010. "Advertising Competition in Retail Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-38, August.
    • Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:70
    DOI: 10.2202/1935-1682.2038
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    References listed on IDEAS

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    1. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(2), pages 317-349.
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    Cited by:

    1. Bagwell Kyle & Lee Gea M., 2010. "Advertising Collusion in Retail Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-54, August.
    2. Yi Xiang & David Soberman & Hubert Gatignon, 2022. "The Effect of Marketing Breadth and Competitive Spread on Category Growth," Production and Operations Management, Production and Operations Management Society, vol. 31(2), pages 622-644, February.

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    More about this item

    Keywords

    advertising; regulation; private information; retail markets;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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