Coordination Economies

Kyle Bagwell and Garey Ramey

No 1034, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: We introduce a model of the retail firm in which consumers and active firms benefit collectively from coordination of sales at fewer firms. Using this model, we show that ostensibly uninformative advertising plays a key role in bringing about coordination economies, by directing consumer search toward firms taht offer the best deals. Optimal consumer scarch takes the form of a simple rule of thumb that uses observed advertising information to guide search. Both industry concentration and social surplus are higher in the presence of advertising, relative to a no-advertising benchmark.

Date: 1992-01
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Working Paper: Coordination Economies (1995)
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