A laboratory study of advertising and price competition |
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Authors: | John Morgan |
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Institution: | a Haas School of Business and the Department of Economics, University of California, Berkeley, CA, USA b School of Economics, University of Nottingham, University Park, Nottingham NG7 2RD, UK |
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Abstract: | We use a laboratory experiment to study advertising and pricing behavior in a market where consumers differ in price sensitivity. Equilibrium in this market entails variation in the number of firms advertising and price dispersion in advertised prices. We vary the cost to advertise as well as varying the number of competing firms. Theory predicts that advertising costs act as a facilitating device: higher costs increase firm profits at the expense of consumers. We find that higher advertising costs decrease demand for advertising and raise advertised prices, as predicted. Further, this comes at the expense of consumers. However, advertising strategies are more aggressive than theory predicts with the result that firm profits do not increase. |
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Keywords: | C72 C92 |
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