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Costly Buyer Search in Laboratory Markets with Seller Advertising

Timothy Cason () and Shakun Datta
Authors registered in the RePEc Author Service: Shakun D. Mago ()

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: In this laboratory experiment sellers simultaneously post prices and choose whether to advertise. Buyers then decide whether to buy from a seller whose advertisement they have received, or engage in costly sequential search to obtain price quotes from other sellers. In the unique symmetric equilibrium, sellers either charge a high unadvertised price or randomize in an interval of lower advertised prices. Increases in either search or advertising costs raise equilibrium prices, and equilibrium advertising intensity decreases with lower search costs and higher advertising costs. Our results are consistent with most of these comparative static predictions, and sellers also post lower advertised than unadvertised prices as predicted. In all treatments, however, sellers price much lower than the equilibrium interval and earn very low profits. Although buyers’ search decisions are approximately optimal, sellers advertise more intensely than predicted. Consequently, market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium that features significant seller market power.

Keywords: Experiment; Posted offer; Market power; Mixed strategy; Uncertainty; Shopping (search for similar items in EconPapers)
JEL-codes: D43 D83 L13 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2008-04
New Economics Papers: this item is included in nep-com, nep-exp, nep-mic and nep-mkt
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Citations: View citations in EconPapers (3) Track citations by RSS feed

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Journal Article: COSTLY BUYER SEARCH IN LABORATORY MARKETS WITH SELLER ADVERTISING* (2010) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1212

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