An experimental study of price dispersion in an optimal search model with advertising

Abstract This paper reports a laboratory experiment to study pricing and advertising behavior with costly buyer search. Sellers simultaneously post prices and may incur a cost to advertise this price. In the unique symmetric equilibrium, sellers either charge a high unadvertised price or randomize in an interval of lower advertised prices. Increases in search or advertising costs raise equilibrium prices, and equilibrium advertising intensity decreases with lower search costs and higher advertising costs. Our experimental results support these comparative static predictions, and sellers also post high unadvertised prices as predicted. In all treatments, however, sellers advertise more intensely than in equilibrium.

[1]  J. Morgan,et al.  A Laboratory Study Of Advertising And Price Competition , 2006 .

[2]  K. Judd,et al.  EQUILIBRIUM PRICE DISPERSION , 1983 .

[3]  Joseph E. Stiglitz,et al.  The Theory of Sales: A Simple Model of Equilibrium Price Dispersion with Identical Agents , 1982 .

[4]  Arlington Williams,et al.  The Hayek Hypothesis in Experimental Auctions: Institutional Effects and Market Power , 1991 .

[5]  P. Diamond.  A model of price adjustment , 1971 .

[6]  Michael R. Baye,et al.  Price Dispersion in the Small and in the Large: Evidence from an Internet Price Comparison Site , 2004 .

[7]  Timothy N. Cason,et al.  Buyer search and price dispersion: a laboratory study , 2003, J. Econ. Theory.

[8]  Dale O. Stahl,et al.  Oligopolistic Pricing with Sequential Consumer Search , 1989 .

[9]  D. Stahl.  Strategic Advertising and Pricing with Sequential Buyer Search , 1991 .

[10]  Erik Brynjolfsson,et al.  Frictionless Commerce? A Comparison of Internet and Conventional Retailers , 2000 .

[11]  Dale O. Stahl,et al.  INFORMATIVE PRICE ADVERTISING IN A SEQUENTIAL SEARCH MODEL , 1993 .

[12]  Joseph E. Stiglitz,et al.  Equilibrium in Product Markets with Imperfect Information , 1979 .

[13]  Price Advertising and Coupons in a Monopoly Model , 1996 .

[14]  M. Dufwenberg,et al.  Price Competition and Market Concentration : An Experimental Study * , 1998 .

[15]  Gerard R. Butters.  Equilibrium Distributions of Sales and Advertising Prices , 1977 .

[16]  V. Smith.  Microeconomic Systems as an Experimental Science , 1982 .

[17]  Theo Offerman,et al.  Forthcoming Review of Economic Studies Imitation and Belief Learning in an Oligopoly Experiment , 2002 .

[18]  Michael R. Baye,et al.  Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets , 2001 .

[19]  Charles A. Holt,et al.  CONSUMER SEARCH COSTS AND MARKET PERFORMANCE , 1996 .

[20]  Martin Sefton,et al.  An experimental comparison of two search models , 2000 .

[21]  Urs Fischbacher,et al.  z-Tree - Zurich toolbox for readymade economic experiments: experimenter's manual , 1999 .

[22]  Jennifer F. Reinganum.  A Simple Model of Equilibrium Price Dispersion , 1979, Journal of Political Economy.

[23]  David M. Grether,et al.  Uncertainty and Shopping Behaviour: An Experimental Analysis , 1988 .

[24]  Manfred Kochen,et al.  On the economics of information , 1972, J. Am. Soc. Inf. Sci..

[25]  S. Salop.  Wage differentials in a dynamic theory of the firm , 1973 .

[26]  J. Stiglitz,et al.  Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion , 1977 .

[27]  J. C. Pernías,et al.  Risk Attitudes and Internet Search Engines: Theory and Experimental Evidence , 2004 .

[28]  Dale O. Stahl,et al.  Oligopolistic pricing with heterogeneous consumer search , 1996 .

[29]  Random Advertising and Monopolistic Price Dispersion , 1994 .

[30]  John Morgan,et al.  An experimental study of price dispersion , 2006, Games Econ. Behav..

[31]  H. Varian.  A Model of Sales , 1980 .