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COSTLY BUYER SEARCH IN LABORATORY MARKETS WITH SELLER ADVERTISING

Authors


  • *We thank Jacques Robert, Emmanuel Dechenaux, David Reiley, Andrew Yates, the Editor, and two anonymous referees for helpful suggestions, Jeff Bayer for research assistance, and seminar audiences at Harvard and Michigan State Universities, the Universities of Amsterdam, Arizona, Nottingham and Tilburg, and the Wissenschaftszentrum Berlin (WZB) for useful feedback. The Purdue University Faculty Scholar program and the Purdue Research Foundation provided financial support.

Abstract

In this experiment, sellers simultaneously choose prices and advertising strategies. Buyers either purchase at an advertised price or search sequentially for other prices. In the unique symmetric equilibrium, sellers charge a high unadvertised price or advertise a price chosen from a lower interval. Increases in search or advertising costs raise equilibrium prices and affect equilibrium advertising intensity. Empirical results are consistent with most comparative static predictions. Sellers, however, price much lower and advertise more intensely than predicted. Consequently, market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium with significant seller market power.

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