Advertising Competition in Retail Markets

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.

Pro-generics policies and the backlog in medicines registration in South Africa: implications for access to essential and affordable medicines

“…The pro-generics policy is intended to promote competition; the theory being that as more competitors enter a market, prices of products will fall [20]. Thus, registering a large number of generic brands of a particular medicine should drive down the price of that medicine.…”

Spatial Advertisement Competition: Based on Game Theory

“…Baye and Morgan [12] recently developed exogenous advertisement theory. Bagwell and Lee [13] recently discussed the nonprice advertisement competitions in retail and argued that under free entry, social surplus is higher when advertising is allowed.…”

The Effect of Marketing Breadth and Competitive Spread on Category Growth

“… 11 11 This has resulted in a significant literature related to the motivation that firms have to collude in order to limit marketing spending (Bagwell and Lee 2010). …”

“…Details of the reestimation are provided in the Appendix (Table A4). 11 This has resulted in a significant literature related to the motivation that firms have to collude in order to limit marketing spending (Bagwell and Lee 2010). 12 In a mature category, it is more difficult for a category to grow because a high fraction of potential customers has already entered the market.…”