Pricing, Advertising, and Market Structure with Frictions

Pedro Gomis-Porqueras, Benoit Julien and Chengsi Wang ()
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Chengsi Wang: School of Economics, University of New South Wales

No 2010-20, Discussion Papers from School of Economics, The University of New South Wales

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.

Keywords: Directed searching; Advertising; Pricing; Market structure (search for similar items in EconPapers)
JEL-codes: E52 E63 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010-11
New Economics Papers: this item is included in nep-com, nep-dge, nep-mac and nep-mkt
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Working Paper: Pricing, Advertising, and Market Structure with Frictions (2010)
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