Department of Finance

Asymmetric Market Shares, Advertising, and Pricing: Equilibrium with an Information Gatekeeper

Department of Economics
University of Delaware
Working Paper #2008-14

Asymmetric Market Shares, Advertising, and Pricing:
Equilibrium with an Information Gatekeeper

Michael A. Arnold, Chenguang Li, Christine Saliba, and Lan Zhang

ABSTRACT

We analyze the impact of market share on advertising and pricing decisions by firms that sell to loyal, non-shopping customers and can advertise to shoppers through an information intermediary or "gatekeeper." In equilibrium the firm with the smaller loyal market advertises more aggressively but prices less competitively than the firm with the larger loyal market, and there is no equilibrium in which both firms advertise with probability 1. The results differ significantly from earlier literature which assumes all prices are revealed to shoppers and finds that the firm with the smaller loyal market adopts a more competitive pricing strategy. The predictions of the model are consistent with advertising and pricing behavior observed on price comparison websites such as Shopper.com.

Keywords: online markets, E-commerce, market share, information gatekeeper, equilibrium price dispersion, advertising

JEL Classification: D4, D83, L19, L89

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