On informative advertising and product differentiation

Market Frictions: A Unified Model of Search and Switching Costs

“…If one sets switching costs to zero, the price derived in (6) o¤ers an original uni…cation of the equilibrium prices found in the search models of Anderson and Renault (1999) and Wolinksy (1986) (which assume market coverage and non-market coverage, respectively). Second, by setting search costs to zero, such that b x = "; the model collapses to a static analysis of switching costs which shares some similar features to the framework used in the in…nite horizon (duopoly) models of Doganoglu (2005) and Cabral (2008) 11 .…”

“…While recent dynamic models have stressed the possibility that the incentives generated by switching costs can be procompetitive (Doganoglu 2005 Using a di¤erent mechanism to the current paper and not allowing for the possibility that consumers may face both costs, they develop a model capable of identifying whether consumers'television viewing behaviour is more consistent with the existence of search or switching costs. They show the former is true for 71% of consumers, and estimate the average search cost to be relatively larger than the average switching cost 6 . 6 Speci…cally, they identify the costs by showing that a consumer who is constrained by switching costs will be equally likely to switch following a reduction in the quality of the current product choice relative to an equivalent increase in the quality of an alternative product, whereas a reduction in the quality of the current choice will produce an asymmetrically larger e¤ect in a consumer constrained by search costs.…”

“…They show the former is true for 71% of consumers, and estimate the average search cost to be relatively larger than the average switching cost 6 . 6 Speci…cally, they identify the costs by showing that a consumer who is constrained by switching costs will be equally likely to switch following a reduction in the quality of the current product choice relative to an equivalent increase in the quality of an alternative product, whereas a reduction in the quality of the current choice will produce an asymmetrically larger e¤ect in a consumer constrained by search costs.…”

On the Competitive Effect of Informative Advertising

“…This feature is also present in our paper, and we carefully derive the existence condition, which is not done in the previous studies. Christou and Vettas (2008) show that when the number of …rms increases, advertising becomes lower, while the e¤ect on prices is ambiguous. Thus, there might be a positive relationship between advertising and prices as the number of …rms increases, but not for a given number of …rms.…”

“…This paper, too, recognises that consumers in the monopoly segment may be responsive to prices, but in the equilibrium analysis attention is restricted to the case with price inelastic demand from captive consumers. Christou and Vettas (2008) address the competitive effects of informative advertising but on the basis of a very di¤erent modelling approach. They use a random utility model, where each consumer's gross valuation of a product is randomly drawn from some distribution and observed only after the receipt of an ad.…”