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Asymmetric Market Shares, Advertising, and Pricing: Equilibrium with an Information Gatekeeper

Author

Listed:
  • Michael A. Arnold

    (Department of Economics,University of Delaware)

  • Chenguang Li

    (Indiana University)

  • Christine Saliba

    (University of Delaware)

  • Lan Zhang

    (Indiana University)

Abstract

We analyze the impact of market share on advertising and pricing decisions by firms that sell to loyal, non-shopping customers and can advertise to shoppers through an information intermediary or "gatekeeper." In equilibrium the firm with the smaller loyal market advertises more aggressively but prices less competitively than the firm with the larger loyal market, and there is no equilibrium in which both firms advertise with probability 1. The results differ significantly from earlier literature which assumes all prices are revealed to shoppers and finds that the firm with the smaller loyal market adopts a more competitive pricing strategy. The predictions of the model are consistent with advertising and pricing behavior observed on price comparison websites such as Shopper.com.

Suggested Citation

  • Michael A. Arnold & Chenguang Li & Christine Saliba & Lan Zhang, 2008. "Asymmetric Market Shares, Advertising, and Pricing: Equilibrium with an Information Gatekeeper," Working Papers 08-14, University of Delaware, Department of Economics.
    • Handle: RePEc:dlw:wpaper:08-14.
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. David Ronayne, 2021. "Price Comparison Websites," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(3), pages 1081-1110, August.
    2. Shelegia, Sandro & Wilson, Chris, 2016. "A Generalized Model of Sales," EconStor Preprints 147411, ZBW - Leibniz Information Centre for Economics.
    3. Astorne-Figari, Carmen & López, José Joaquín & Yankelevich, Aleksandr, 2019. "Advertising for consideration," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 653-669.
    4. Debashrita Mohapatra & Debi Prasad Mohapatra & Ram Sewak Dubey, 2023. "Price dispersion across online platforms: Evidence from hotel room prices in London (UK)," Papers 2310.12341, arXiv.org.
    5. Zheyin (Jane) Gu & Xinxin Li, 2023. "Social Sharing, Public Perception, and Brand Competition in a Horizontally Differentiated Market," Information Systems Research, INFORMS, vol. 34(2), pages 553-569, June.
    6. García-Gallego Aurora & Georgantzís Nikolaos & Pereira Pedro & Pernías-Cerrillo José C., 2016. "Bias and Size Effects of Price-Comparison Platforms: Theory and Experimental Evidence," Review of Network Economics, De Gruyter, vol. 15(1), pages 1-34, March.
    7. Michael Arnold & Eric Schmidbauer & Lan Zhang, 2022. "Uniform and targeted informative advertising with asymmetric customer loyalty," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(1), pages 90-114, February.
    8. Sandro Shelegia & Chris M. Wilson, 2021. "A Generalized Model of Advertised Sales," American Economic Journal: Microeconomics, American Economic Association, vol. 13(1), pages 195-223, February.
    9. Jihui Chen & Qihong Liu, 2013. "Information markets, product markets and vertical merger," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(1), pages 33-61, January.
    10. Joao Montez & Nicolas Schutz, 2021. "All-Pay Oligopolies: Price Competition with Unobservable Inventory Choices [Extremal Equilibria of Oligopolistic Supergames]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2407-2438.
    11. Arnold, Michael & Zhang, Lan, 2020. "Competition with an information clearinghouse and asymmetric firms: Why more than two firms compete (or not) for shoppers," Games and Economic Behavior, Elsevier, vol. 122(C), pages 55-82.
    12. Shelegia, Sandro & Wilson, Chris M., 2022. "Costly participation and default allocations in all-pay contests," MPRA Paper 115027, University Library of Munich, Germany.

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    More about this item

    Keywords

    online markets; E-commerce; market share; information gatekeeper; equilibrium price dispersion; advertising;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L19 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Other
    • L89 - Industrial Organization - - Industry Studies: Services - - - Other

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