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Advertising, Pricing & Market Structure in Competitive Matching Markets

Edner Bataille and Benoit Julien ()
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Edner Bataille: California State University-Bakersfield

Industrial Organization from EconWPA

Abstract: This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers. Sellers' expenditure on directly informative advertising attracts consumers only probabilistically. Consumers who happen to observe advertisements randomize over the advertised sellers using symmetric mixed strategies. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed, including the interplay of prices and advertising with the market structure. The model generates a unimodal (inverted U-shape) relationship between both, individual and industry advertising level, and market structure. The relationship results from a trade off between a price effect and a market structure-matching effect. We find that the decentralized market has underprovision of advertising, both for individual sellers and industry wide, and that entry is excessive relative to the efficient level. We present a quantitative analysis to highlight properties of the models and to demonstrate the extent of inefficiency.

Keywords: Advertising; pricing; market structure; endogenous matching; asymmetric information; efficiency. (search for similar items in EconPapers)
JEL-codes: B21 C72 C78 D40 D43 D61 D83 J41 L11 M37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-gth, nep-ind, nep-mic and nep-mkt
Date: 2005-11-15
Note: Type of Document - pdf; pages: 34
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpio:0511008

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