Existence Advertising, Price Competition and Asymmetric Market Structure

Abstract

We examine a two-stage duopoly game in which firms advertise their existence to consumers in stage 1 and compete in prices in stage 2. Whenever the advertising technology generates positive overlap in customer bases, the equilibrium for the stage-1 game is asymmetric in that one firm chooses to remain small in comparison to its competitor. For a specific random advertising technology, we show that one firm will always be half as large as the other. No pure-strategy price equilibrium exists in the stage-2 game, and as long as there is some overlap in customer bases, the mixed-strategy price equilibrium does not converge to the Bertrand equilibrium.

Informative Advertising in Directed Search

“…We consider two mechanisms in this paper: first-price auction and price posting. 8 The auction mechanism captures the fact that in a wide range of markets, sellers have only limited ability to commit to the posted price. When there is only one buyer visiting a particular seller, the terms of trade is given by the posted reserve price.…”

“…Assume that each website has a readership of x in the population. Then a fraction x of the population 8 The auction mechanism was introduced into matching environment by Peters and Severinov (1997), Peters (1997) and Julien, Kennes and King (2000). The price-posting mechanism was discussed by Peters (1984Peters ( , 1991Peters ( , 2000 and Burdett, Shi and Wright (2001).…”

Uniform and targeted informative advertising with asymmetric customer loyalty

“…We define a more competitive pricing strategy as a mixed strategy pricing distribution that places greater weight on lower prices-that is, the less competitive pricing distribution first-order stochastically dominates the more competitive pricing distribution-and a more intense advertising strategy as one under which the firm has a higher probability of advertising.6 The ability to target to loyal customers in our model creates incentives similar to the ability to choose not to advertise through the clearinghouse and sell to one's loyal customers at the monopoly price in the information clearinghouse setting.7Baye et al (1992) extend Varian's model to the case of n > 2 firms and show that although there are multiple asymmetric equilibria, there is a unique symmetric subgame perfect equilibrium. Similarly,Kocas and Kiyak (2006) consider n > 2 firms and find an equilibrium in which only the firms with the two smallest loyal markets compete for shoppers, while all other firms sell to their loyal customers at the monopoly price.8Chioveanu (2008) andEaton et al (2010) show how asymmetric loyal shares arise endogenously in a model of persuasive (or existence) advertising in which firms advertise to attract loyal market shares. Both papers consider a subgame perfect equilibrium of a game in which the second stage entails price competition with no advertising, similar toNarasimhan (1988), after asymmetric shares are established in the first stage.…”