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Going Where the Ad Leads You: On High Advertised Prices and Searching Where to Buy

Department of Economics, University of Vienna, 1010 Vienna, Austria, and Department of Economics, Erasmus University Rotterdam, 3000 DR Rotterdam, The Netherlands
Tinbergen Institute, Erasmus University Rotterdam, 3062 PA Rotterdam, The Netherlands, and University of Groningen, 9700 AV Groningen, The Netherlands
janssen{at}few.eur.nl
mariellenon{at}gmail.com

An important role of informative advertising is to inform consumers of the simple fact that the shop that advertises sells a particular product. This information may help consumers to save on their search activities: instead of wandering around, a consumer can simply visit the shop that has advertised, knowing that there he can find the commodity he is looking for. The implications of this simple fact have not been studied before. Using game theoretic reasoning in a model that combines consumer search and firms' advertising we show that firms may find it optimal to advertise prices that are higher than nonadvertised prices. The important mechanism underlying this result is that advertising lowers the expected search cost for consumers. Through this analysis we provide a new insight into the role of informative advertising.

Key Words: consumer search; informative advertising; pricing strategy
History: Received: October 18, 2006; accepted: January 2, 2008.