Attraction Versus Persuasion

Pak Hung Au () and Mark Whitmeyer ()
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Pak Hung Au: Department of Economics, The Hong Kong University of Science and Technology
Mark Whitmeyer: Hausdorff Center for Mathematics & Institute for Microeconomics, University of Bonn

No 202102, HKUST CEP Working Papers Series from HKUST Center for Economic Policy

Abstract: We consider a model of oligopolistic competition in a market with search frictions, in which competing firms with products of unknown quality advertise how much information a consumer’s visit will glean. We characterize the unique symmetric equilibrium of this game, which, due to the countervailing incentives of attraction and persuasion, generates a payoff function for each firm that is linear in the firm’s realized effective value. If the expected quality of the products is sufficiently high (or competition is sufficiently fierce), this corresponds to full information–search frictions beget the first-best level of information provision. If not, this corresponds to information dispersion–firms randomize over signals. If the attraction incentive is absent (due to hidden information or costless search), firms reveal less information and information dispersion does not arise.

Date: 2021-02
New Economics Papers: this item is included in nep-com, nep-gth and nep-mic
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