Experimental evidence on advertising and price competition

Abstract

Theory (Du, 2008) predicts that equilibrium prices will be lower when firms' advertising conveys the price than when it does not convey the price. In the laboratory sessions, sellers make two decisions: what price to set, and whether to advertise to eliminate consumer search costs for their product. The two experimental conditions are (1) advertising the price, or (2) advertising before pricing. Data from ten sessions indicate that, as predicted, firms choose more often to advertise when advertising conveys price, and prices in the second treatment are significantly higher than prices in the first treatment.

Keywords:

• experiment
• advertising
• search cost
• pricing

Acknowledgements

The author is grateful to Jim Cox and Martin Dufwenberg for their guidance. Financial Support from the Economic Science Laboratory of the University of Arizona is gratefully acknowledged. The author also wants to thank one anonymous referee, Charles Noussair, David Reiley, Maros Servatka and Steven Tucker for many detailed comments. Any errors are the responsibility of the author.