Hideo Konishi and Michael T. Sandfort
"Expanding demand through price advertisement," International Journal of Industrial Organization Volume 20, Issue 7, September 2002, pages 965-94.
JEL codes: D4, L0, M3
Keywords: advertisement, search goods, consumer search
Abstract: Retail stores frequently advertise prices. When consumer search is costly, advertising low prices expands the number of consumers who visit and buy. We show that this demand enhancement may offset a retailer's loss in margins from the low price, making advertisement desirable. We further show that a multi-product monopolist may choose to advertise low prices only for select products, even when advertised and non-advertised products are substitutes. For duopolist retailers at a common location, an equilibrium exists in which (for some range of advertising costs) one store advertises and the other free-rides on its competitor.