Coordination Economies, Advertising, and Search Behavior in Retail Markets

Kyle Bagwell and Garey Ramey

American Economic Review, 1994, vol. 84, issue 3, 498-517

Abstract: The authors 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, the authors show that ostensibly uninformative advertising plays a key role in bringing about coordination economies by directing consumer search toward firms that offer the best deals. Optimal consumer search 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. Copyright 1994 by American Economic Association.

Date: 1994
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