Existence Advertising, Price Competition, and Asymmetric Market Structure

RePEc Working Papers Series: No. 20/2008 This working paper expands upon ideas presented in: Eaton, B.C., MacDonald, I.A. and Meriluoto, L. (2007) Price Competition when Not All Customers Know of All Firms. Christchurch, New Zealand: 48th Annual Conference New Zealand Association of Economists (NZAE), 27-29 Jun 2007.We examine a two stage duopoly game in which firms advertise their existence to consumers in stage 1 and compete in prices in stage 2. Whenever the advertising technology generates positive overlap in customer bases the equilib- rium for the stage 1 game is asymmetric in that one firm chooses to remain small in comparison to its competitor. For a specific random advertising technology we show that one firm will always be half as large as the other. No equilibrium in pure price strategies exists in the stage 2 game and as long as there is some overlap in customer bases the mixed strategy equilibrium is far from the Bertrand equilibrium