Advertising Competition in Retail Markets

We consider non-price advertising by retail \u85rms that are privately informed as to their respective production costs. We construct an advertising equilibrium, in which informed con-sumers use an advertising search rule whereby they buy from the highest-advertising \u85rm. Con-sumers are rational in using the advertising search rule, since the lowest-cost \u85rm advertises the most and also selects the lowest price. Even though the advertising equilibrium facilitates productive e ¢ ciency, we establish conditions under which \u85rms enjoy higher expected pro\u85t when advertising is banned. Consumer welfare falls in this case, however. Under free entry, social surplus is higher when advertising is allowed. In addition, we consider a benchmark model of price competition; we provide comparative-statics results with respect to the number of informed consumers, the number of \u85rms and the distribution of costs; and we consider the possibility of sequential search