Advertising and Coordination

Kyle Bagwell and Garey Ramey

The Review of Economic Studies, 1994, vol. 61, issue 1, 153-171

Abstract: When market information such as price is difficult to communicate, consumers and firms may be unable to take advantage of mutually beneficial scale economies, so that coordination failures arise. Ostensibly uninformative advertising expenditures can be used to eliminate coordination failures, by allowing an efficient firm to communicate implicitly that it offers a low price. This provides a theoretical explanation for Benham's (1972) empirical association of the ability to advertise with lower prices and larger scale. Advertising becomes necessary for optimal coordination when the identity of the efficient firm is uncertain. An application to loss-leader pricing is developed.

Date: 1994
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Working Paper: Advertising and Coordination (1990)
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