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Brand and Price Advertising in Online Markets

Author

Listed:
  • Michael R. Baye

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47401)

  • John Morgan

    (Haas School of Business, University of California, Berkeley, Berkeley, California 94720)

Abstract
We model an environment where e-retailers sell similar products and endogenously engage in both brand advertising (to create loyal customers) and price advertising (to attract "shoppers"). In contrast to models where loyalty is exogenous, endogenizing the creation of loyal customers by allowing firms to engage in brand advertising leads to a continuum of symmetric equilibria; however, there is a unique equilibrium in secure strategies, and the set of equilibria converges to this unique equilibrium as the number of potential e-retailers grows arbitrarily large. Price dispersion is a key feature of all of these equilibria, including the limit equilibrium. Branding tightens the range of prices and reduces the value of the price information provided by a comparison site, and this reduces profits for platforms (such as an Internet price comparison site) where firms advertise prices. Data from a leading price comparison site are shown to be consistent with several predictions of the model.

Suggested Citation

  • Michael R. Baye & John Morgan, 2009. "Brand and Price Advertising in Online Markets," Management Science, INFORMS, vol. 55(7), pages 1139-1151, July.
    • Handle: RePEc:inm:ormnsc:v:55:y:2009:i:7:p:1139-1151
    DOI: 10.1287/mnsc.1090.1005
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    price dispersion; pricing; advertising; media; promotion;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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