Strategic Advertising and Directed Search

Abstract

Imperfect observability and costly informative advertising are introduced into a standard directed search framework. Capacity-constrained sellers send costly advertisements to direct buyers' uncoordinated search by specifying their location and terms of trade. We show that the equilibrium advertising intensity is nonmonotonic in the buyer-seller ratio. In addition, we also find that price posting dominates auctions since both mechanisms yield the same expected revenue, but the latter results in higher advertising expense. Finally, we find a positive comovement between market transparency and price for low market tightness when the measure of informed buyers is endogenous. * Manuscript

Directed Search and Competitive Search Equilibrium: A Guided Tour

“…However, his result requires finite numbers, as the fraction of informed buyers does not affect prices with a continuum. Gomis-Porqueras, Julien, and Wang (2017) pursue this when the number of informed buyers is endogenized by costly advertising. They show more information can raise prices even in large markets.…”

Uncertain Product Availability in Search Markets

“…Although a higher share of price-comparing consumers implies that firms compete more intensely to attract them, the competitive impact may be dominated by the above anti-competitive effect. Other papers which study uncertain product availability in consumer search markets, but without the information asymmetry, include Janssen and Rasmusen (2002), Rhodes (2011), Gomis-Porqueras et al (2017 and…”

Equilibrium Price and Advertisement Distributions

“…This means that in our set-up it is natural to assume free entry and exit. In Gomis-Porqueras et al (2017) the intensity of advertising can be continuously adjusted, and the market tightness is taken as a parameter. They study trading by both posted prices and auction, and in both cases find a unique equilibrium in pure strategies.…”