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Going where the Ad leads you: On High Advertised Prices and Search where to buy

Author

Listed:
  • Maarten C.W. Janssen

    (Faculty of Economics, Erasmus Universiteit Rotterdam)

  • Marielle C. Non

    (Faculty of Economics, Erasmus Universiteit Rotterdam)

Abstract

The search literature assumes that consumers know which firms sell products they are looking for, but are unaware of the particular variety and the prices at which each firm sells. In this paper, we consider the situation where consumers are uncertain whether a firm carries the product at all by proposing a model where in the first stage firms decide on whether or not to carry the product. Firms may advertise, informing consumers not only of the price they charge, but also of the basic fact that they sell the product. In this way, advertising lowers the expected search cost. We show that this role of advertising can lead to a situation where advertised prices are higher than non—advertised prices in equilibrium.

Suggested Citation

  • Maarten C.W. Janssen & Marielle C. Non, 2006. "Going where the Ad leads you: On High Advertised Prices and Search where to buy," Tinbergen Institute Discussion Papers 06-075/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20060075
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    References listed on IDEAS

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    1. David A. Soberman, 2004. "Research Note: Additional Learning and Implications on the Role of Informative Advertising," Management Science, INFORMS, vol. 50(12), pages 1744-1750, December.
    2. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October.
    3. Ackerberg, Daniel A, 2001. "Empirically Distinguishing Informative and Prestige Effects of Advertising," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 316-333, Summer.
    4. 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.
    5. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
    6. Stigler, George J., 2011. "Economics of Information," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 35-49.
    7. Janssen, Maarten C.W. & Non, Marielle C., 2008. "Advertising and consumer search in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 354-371, January.
    8. Meurer, Michael & Stahl, Dale II, 1994. "Informative advertising and product match," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 1-19, March.
    9. Stivers, Andrew & Tremblay, Victor J., 2005. "Advertising, search costs, and social welfare," Information Economics and Policy, Elsevier, vol. 17(3), pages 317-333, July.
    10. 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.
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    Cited by:

    1. Maarten C. W. Janssen & Marielle C. Non, 2009. "Going Where the Ad Leads You: On High Advertised Prices and Searching Where to Buy," Marketing Science, INFORMS, vol. 28(1), pages 87-98, 01-02.

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    More about this item

    Keywords

    consumer search; informative advertising;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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