Informative Advertising, Consumer Search and Transparency Policy

Chengsi Wang

MPRA Paper from University Library of Munich, Germany

Abstract: Information about a new or non-frequently purchased product is often produced by both sides of the market. We construct a monopoly pricing model consisting of both seller's information disclosure and consumer's information acquisition. The presence of consumer search, which lowers the probability of making sales, creates incentive for the monopolist to deter search. In contrast with most previous literature, we show that, partial information disclosure arises in equilibrium when the search cost is low. As the search cost increases to medium level, the monopolist hides information but lowers the price to prevent consumers from searching. When the search cost is very high, the monopolist charges high price and hides all information. The equilibrium price is thus non-monotonic in search cost. Information disclosure and consumer search co-exist only when the search cost is low, and thus complement each other. We show that transparency policies on advertising cannot improve social welfare. Nevertheless, they benefit consumers in a wide range of values of the search costs by improving matching quality and reducing the expense of searching. But for some medium levels of search costs, transparency policies hurt consumers due to the induced high price in equilibrium.

Keywords: Monopoly Pricing; Information Disclosure; Information Acquisition; Search Cost; Transparency Policy (search for similar items in EconPapers)
JEL-codes: D42 D83 M37 (search for similar items in EconPapers)
Date: 2011-10-03
New Economics Papers: this item is included in nep-com, nep-cta and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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