Informative Price Advertising in a Sequential Search Model

Abstract

This paper studies the role and implications of price advertising when shopping trips are costly to consumers. The authors present a model where consumers search sequentially and where stores advertise the price. Their model has a unique equilibrium exhibiting price dispersion. The model generates predictions about the shape of the price distribution and firms' advertising behavior. Also when the initial advertising costs are precisely zero, entry drives the equilibrium to the perfectly competitive outcome; while otherwise entry drives prices higher. Finally, when advertising costs shrink, prices become competitive; however, when search costs shrink, prices remain bounded above marginal production costs. Copyright 1993 by The Econometric Society.