Working Papers

Comparative Advertising: The role of prices

In markets where firms sell similar goods to their competitors, firms may be able to free-ride off the costly price signalling of competitor firms by engaging in price comparative advertising. As the goods are similar consumers can reason that if one good is high quality (revealed for instance through price signalling) then so is the other. This paper models this phenomenon and finds that in equilibrium there will be firms price signalling as well as freeriding firms that signal through advertising. Surplus is strictly higher in markets where advertising firms are active relative to pure price signalling markets. In some cases advertising markets can be even more efficient than full information markets as advertisers surrender market power to avoid costly price signalling.

JEL Codes: D82, D83, M37

Keywords: Comparative advertising, Price Signalling

Version as MPRA Paper No. 79872

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It's good to be bad: A model of low quality dominance in a full information consumer search market (with Margaryta Klymak)

This paper examines a consumer search market exhibiting vertically differentiated firms, heterogeneous consumers and endogenous consumer market entry. In an asymmetric information setting high and low quality firms make equal sales and profit in this market. Conversely when there is full information, search frictions induce an unravelling mechanism that leads to a unique refined equilibrium where all consumers approach low quality firms and high quality firms make no sales or profit. This presents a rationale for why low quality firms may disclose their quality and high quality firms may not even when disclosure is costless.

JEL Codes: D82, D83, L15

Keywords: Quality Disclosure, Consumer Search

Version as Edinburgh School of Economics discussion paper 280

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