Advertising and consumer search in differentiated markets
Harriott, Kevin Kenton
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This dissertation, in its most general context, is an investigation into the modeling of markets with imperfectly informed agents. In such markets, there will invariably be incentives for informed agents to take advantage of information asymmetries by disseminating the relevant information to uninformed agents. Similarly, there will be incentives for uniformed agents to reduce the adverse effects of information asymmetries by acquiring the relevant information. The primary purpose of this dissertation is to demonstrate that the understanding of such markets can be greatly enhanced by explicit modeling both channels of information flow as omitting either channel could eliminate important interaction effects. The arguments in this dissertation are narrowly framed within a familiar differentiated market in which firms advertise and each consumer is imperfectly informed about which product is most suited to his taste. However, the conclusions drawn in the dissertation are applicable to more general economic systems in which it is costly for agents to acquire information relevant to the decision-making process. There is a long-standing debate in the literature about whether or not advertising is purely informative. Although there is extensive research on advertising models and consumer search models, little is known about differentiated markets in which firms advertise and consumers search. In modeling advertising and consumer search, this dissertation questions the relevance of two pieces of evidence that have been offered against the view that advertising is informative. In the first instance, I demonstrate that firms may use purely informative advertising and still maintain market power in the long-run in monopolistically competitive markets; this finding thus rejects the argument that firms rely on manipulating consumer preferences in order to maintain market power in these markets. In the second instance, I demonstrate that advertisements without any information about the product being advertised may still be informative to some consumers; this finding thus rejects the argument that the widespread use of uninformative television advertisements is inconsistent with the view that advertising is informative in nature. This dissertation shows that our understanding of the nature of advertising (information dissemination mechanism) is greatly enhanced by modeling consumer search (information acquisition mechanism).