*We thank the Editor and an anonymous referee for constructive comments. Li and Zhang are indebted to Michael Baye for his continuous guidance and encouragement. This paper combines independent research by Arnold and Saliba and by Li and Zhang. Research was supported by the Alfred Lerner College of Business and Economics Research Grant Program.
ASYMMETRIC MARKET SHARES, ADVERTISING AND PRICING: EQUILIBRIUM WITH AN INFORMATION GATEKEEPER*
Article first published online: 23 MAR 2011
© 2011 The Authors. The Journal of Industrial Economics © 2011 Blackwell Publishing Ltd and the Editorial Board of The Journal of Industrial Economics
The Journal of Industrial Economics
Volume 59, Issue 1, pages 63–84, March 2011
How to Cite
ARNOLD, M., LI, C., SALIBA, C. and ZHANG, L. (2011), ASYMMETRIC MARKET SHARES, ADVERTISING AND PRICING: EQUILIBRIUM WITH AN INFORMATION GATEKEEPER. The Journal of Industrial Economics, 59: 63–84. doi: 10.1111/j.1467-6451.2011.00446.x
- Issue published online: 23 MAR 2011
- Article first published online: 23 MAR 2011
We analyze how asymmetric market shares impact advertising and pricing decisions by firms that have loyal, non-shopping customers and can advertise to shoppers through a ‘gatekeeper.’ In equilibrium, the firm with the smaller loyal market advertises more aggressively but prices less competitively than the firm with the larger loyal market. Our results differ significantly from earlier literature which assumes that shoppers observe all prices and finds that the firm with the smaller loyal market adopts a more competitive pricing strategy. The predictions of the model are consistent with advertising and pricing behavior observed on price comparison websites such as http://Shopper.com.