David Myatt, London Business School

Abstract

We study two-stage versions of clearinghouse models, including Varian's classic ``model of sales.''  In the first stage, supplying firms advertise list prices; in a second stage, they can offer discounts but cannot raise their prices.   In contrast to the mixed-strategy equilibria of single-stage games, a unique profile of prices is supported by the play of pure strategies along the equilibrium path, and so we predict stable price dispersion across firms.  In a "loyals and shoppers'' setting  an aggressive firm advertises a low price that captures the shoppers but dissuades all others from discounting.   Equilibrium profits are equal to those in a single-stage game. In a more general clearinghouse setting with incompletely advertised  prices, a firm's price is monotonically related to the reach of its advertising.  With endogenous advertising, firms (even if they are symmetric ex ante) choose strictly asymmetric advertising budgets: a dominant firm advertises widely at a price equal to buyers' willingness to pay;  others restrict their audiences  to a minority of potential customers and charge lower prices.  We also build a model of endogenous consumer search, and once again predict pure-strategy play with price dispersion across firms.

Host: Jacopo Bizzotto