Pricing, Advertising, and Market Structure with Frictions

Gomis-Porqueras, Pedro and Julien, Benoit and Wang, Chengsi (2010): Pricing, Advertising, and Market Structure with Frictions.

Abstract

This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers and uncoordinated buyers. Sellers' search intensity attracts buyers only probabilistically through costly informative advertisement. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed. The model generates an inverted U-shape relationship between individual advertisement and market tightness which is robust to alternative advertising technologies. The well known empirical fact in the IO literature reflects the trade-off between price and market tightness-matching effects. Finally, in this environment we can alleviate the discontinuity problem, allowing for unique symmetric equilibrium price to be derived.

• Item Type: MPRA Paper
• Language: English
• Keywords: Directed searching, Advertising, Pricing,Market structure
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M37 - Advertising

References

[1] Anderson, S. (2005): “Marketing Characteristics”, http://oscar.virginia.edu/asp/PublicAward.asp?AwardID=97064.

[2] Bagwell, K. (2007): “The Economic Analysis of Advertising”, Handbook of Industrial Organization, 3, 1701-1844, North-Holland Amsterdam.

[3] Buxton, A. J., Davies, S. W. and B. R. Lyons (1984): “Concentration and Advertising in buyer and Producer Markets,” Journal of Industrial Economics, 32, 451-64.

[4] Burdett, K., S. Shi and R. Wright (2001): “Pricing and Matching with Frictions”, Journal of Political Economy, 109, 1060-1085.

[5] Butters, G. (1977): “Equilibrium Distribution of Sales and Advertising Prices”, Review of Economic Studies, 44, 465-491.

[6] Deneckere, R. and J. Peck (1995): “Competition Over Price and Service Rate When Demand is Stochastic: A Strategic Analysis”, Rand Journal of Economics, 26, 148-162. [7] Julien, B., J. Kennes and I. King (2000): “Bidding for Labor”, Review of Economic Dynamics, 3, 619-649.

[8] Julien, B., J. Kennes and I. King (2005): “Efficient Bidding and Equilibrium Unemployment”, Canadian Journal of Economics, 38, 174-193.

[9] Lee, C. (2002) “Adverting, Its Determinants and Market Structure", Review of Industrial Organization 21, 89-101.

[10] Lester, B. (2010): “Information and Prices with Capacity Constraints ”, American Economic Review Forthcoming.

[11] McAfee, R. P. (1994): “Endogenous Availability, Cartels, and Merger in an Equilibrium Price Disper- sion,” Journal of Economic Theory, 62, 24-47.

[12] Norman, G., L. Pepall and D. Richards (2008): “Generic Product Advertsing, Spillovers and Market Concentration,” American Journal of Agricultural Economics, 90, 719-732.17

[13] Peters, M. (1991): “Ex Ante Price Offers in Matching Games Non-Steady States”, Econometrica, 59, 1425-1454.

[14] Robert, J. and D. O. Stahl (1993): “Informative Price Advertising in a Sequential Search Model,” Econometrica, 61, 657-86.

[15] Schmalensee, R. (1989) "Inter-industry Studies of Structure and Performance", in: R. Schmalensee and R.Willig, eds., Handbook of Industrial Economics (North-Holland, Amsterdam) 952-1009.

[16] Stegemen, M. (1991): “Advertising in Competitive Markets”, American Economic Review, 81, 210-223.

[17] Stahl, D. O., (1994): “Oligopolistic pricing and Advertising”, Journal of Economic Theory, 64, 162-177.

[18] Tremblay, C. and V. Tremblay (1995) “Advertising, Price, and Welfare: Evidence from the U. S. Brewing Industry ”, Southern Economic Journal, 62, 367-381.

[19] Uri, N. D. (1987), “A Re-examination of the Advertising and Industrial Concentration Relationship,” Applied Economics, 19, 427-35.