Expanding Demand through Price Advertisement

Michael Sandfort and Hideo Konishi
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Michael Sandfort: U.S. Department of Justice

No 453, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Price advertisement by retail stores is pervasive. If there exist non-negligible costs of consumer search, a retailer can increase the number of consumers visiting its location by advertising a low price, thus increasing consumers' expected utilities from search. If the increase in the number of consumers who visit the store is substantial, then the store's profit goes up even though low prices decrease profit margins. We show that this intuition extends to the case of a multi-product monopolist, who may choose to advertise very low prices for a limited number of items it carries, even when advertised and non-advertised commodities are substitutes. Finally, we analyze a retail duopoly in which both stores sell from the same location, showing that under some circumstances, there is an incentive for one of the retailers to free-ride on the other's advertisement.

Keywords: advertisement; search goods; consumer search. (search for similar items in EconPapers)
JEL-codes: D4 L0 M3 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2000-01-20, Revised 2001-06-21
Note: Previously circulated as Price Advertisement by Retail Stores: A Commitment Device
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Published, International Journal of Industrial Organization, 20, 965-994, 2002.

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Journal Article: Expanding demand through price advertisement (2002)
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