Asymmetric Market Shares, Advertising, and Pricing: Equilibrium with an Information Gatekeeper

We analyze the impact of market share on advertising and pricing decisions by firms that sell to loyal, non-shopping customers and can advertise to shoppers through an information intermediary or “gatekeeper.” In equilibrium the firm with the smaller loyal market advertises more aggressively but prices less competitively than the firm with the larger loyal market, and there is no equilibrium in which both firms advertise with probability 1. The results differ significantly from earlier literature which assumes all prices are revealed to shoppers and finds that the firm with the smaller loyal market adopts a more competitive pricing strategy. The predictions of the model are consistent with advertising and pricing behavior observed on price comparison websites such as Shopper.com. ∗This paper combines independent research by Arnold and Saliba from the University of Delaware and Li and Zhang from Indiana University. It was supported by the University of Delaware College of Business and Economics Research Grant Program. Corresponding author, [email protected].