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Hamid Aghadadashli, ECARES Print
Friday, 17 November 2017, 12:15 - 13:15

Hamid Aghadadashli, ECARES

Advertising and Price Competition in Online Markets

Abstract : We analyze a search model in which the order of the search is determined by the firms' pricing and advertising strategies. We consider two groups of consumers. Sophisticated consumers start their search from the lowest priced product, while naive searchers first inspect advertised products. We show how the existence and increasing share of naive consumers affects the equilibrium outcomes. If the share of naive consumers is low, then only one firm advertises in the equilibrium. Otherwise, both firms advertise. Advertisements increase market prices. However, the prices are even higher when only one firm advertises. Given advertisements, consumer welfare decreases in the share of naive consumers. However, there is a threshold level, such that a small increase in their share changes the firms' advertising strategies and decreases market prices. We also show that in the presence of informed consumers, who have zero search costs, all consumers may benefit, suffer, or not be affected from the existence of naive consumers depending on the level of the search costs.

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