Brand and Price Advertising in Online Markets
50 Pages Posted: 15 Dec 2004
Date Written: October 2004
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
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