Brand and Price Advertising in Online Markets

50 Pages Posted: 15 Dec 2004

See all articles by Michael R. Baye

Michael R. Baye

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group

Date Written: October 2004

Abstract

We model a homogeneous product environment where identical e-retailers endogenously engage in both brand advertising (to create loyal customers)and price advertising (to attract shoppers). Our analysis allows for cross-channel effects; indeed, we show that price advertising is a substitute for brand advertising. In contrast to models where loyalty is exogenous, these cross-channel effects lead to a continuum of symmetric equilibria; however, the set of equilibria converges to a 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. While each firm finds it optimal to advertise its brand in an attempt to grow its base of loyal customers, in equilibrium, branding (1) reduces firm profits, (2) increases prices paid by loyals and shoppers, and (3) adversely affects gatekeepers operating price comparison sites. Branding also tightens the range of prices and reduces the value of the price information provided by a comparison site. Using data from a price comparison site, we test several predictions of the model.

Keywords: Price dispersion

JEL Classification: D4, D8, M3, L13

Suggested Citation

Baye, Michael Roy and Morgan, John, Brand and Price Advertising in Online Markets (October 2004). Available at SSRN: https://ssrn.com/abstract=632323 or http://dx.doi.org/10.2139/ssrn.632323

Michael Roy Baye (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-2779 (Phone)
812-855-3354 (Fax)

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2669 (Phone)
810-885-5959 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/rjmorgan/

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