Advertising Collusion in Retail Markets

Abstract

We consider non-price advertising by retail …rms that are privately informed as to their respective production costs. We …rst analyze a static model. We construct an advertising equilibrium, in which informed consumers use an advertising search rule whereby they buy from the highest-advertising …rm. Consumers are rational in using the advertising search rule, since the lowest-cost …rm advertises the most and also selects the lowest price. Even though the advertising equilibrium facilitates productive e¢ ciency, we establish conditions under which …rms enjoy higher expected pro…t when advertising is banned. Consumer welfare falls in this case, however. We next analyze a dynamic model in which privately informed …rms interact repeatedly. In this setting, …rms may achieve a collusive equilibrium in which they limit the use of advertising, and we establish conditions under which optimal collusion entails pooling at zero advertising. More generally, full or partial pooling is observed in optimal collusion. In summary, non-price advertising can promote product e¢ ciency and raise consumer welfare; however, …rms often have incentive to diminish advertising competition, whether through regulatory restrictions or collusion.

What money canʼt buy: Efficient mechanism design with costly signals

“…These include, to name a few, allocation through waiting lines (Holt and Sherman, 1982), lobbying (Hillman and Riley, 1989), R&D races (Che and Gale, 2003), competitions for a monopoly position (Ellingsen, 1991), and money-burning advertising (Bagwell and Lee, 2008).…”

“…Bagwell and Lee (2008) study money-burning advertising. Advertising is not informative but signals the quality of a firm to consumers.…”