Price and match-value advertising with directed consumer search

Abstract

We present a consumer search model in which firms sell products with two product attributes that are horizontally differentiated. One attribute is observable without visiting the firm, while the other can only be discovered upon visiting the store. Search is directed as consumers will be more inclined to visit a firm where they like the observable characteristics. Moreover, firms can influence the order of search by adjusting prices and/or by providing match-value information. We show that price advertising leads to lower prices and profits. With price advertising, a lower price not only retains more consumers, but is also more likely to attract them. Second, we how that with price advertising equilibrium prices and profits decrease in search costs. With higher search costs consumers are less likely to walk away, hence firms are more eager to attract them in the first place. Unless price advertising is prohibitively costly, price advertising will occur in equilibrium. Firms do not want to reveal match-value information, provided search costs are realistically low. JEL Classification: D83, L13.

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