Expanding demand through price advertisement

Retail stores frequently advertise prices. When consumer search is costly, advertising low prices expands the number of consumers who visit and buy. We show that this demand enhancement may offset a retailer’s loss in margins from the low price, making advertisement desirable. We further show that a...

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Bibliographic Details
Published in:International journal of industrial organization 2002-09, Vol.20 (7), p.965-994
Main Authors: Konishi, Hideo, Sandfort, Michael T.
Format: Article
Language:English
Subjects:
Advertisement
Advertising
Consumer search
Consumers
Demand
Industrial organization
Organization theory
Prices
Retailing
Search goods
Studies
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Summary:Retail stores frequently advertise prices. When consumer search is costly, advertising low prices expands the number of consumers who visit and buy. We show that this demand enhancement may offset a retailer’s loss in margins from the low price, making advertisement desirable. We further show that a multi-product monopolist may choose to advertise low prices only for select products, even when advertised and non-advertised products are substitutes. For duopolist retailers at a common location, an equilibrium exists in which (for some range of advertising costs) one store advertises and the other free-rides on its competitor.
ISSN:0167-7187
1873-7986
DOI:10.1016/S0167-7187(01)00082-0