Informative advertising by heterogeneous firms

This paper introduces a model to analyze the role of the cost of information dissemination in large markets where firms have varying degrees of intrinsic efficiency reflected in their marginal costs. Firms enter a market and discover how efficient they are. Those firms with high enough efficiency stay, others exit. Remaining firms then compete to attract consumers by disseminating information about their existence and their prices using a common advertising technology. The properties of the model’s equilibrium are analyzed. The model is then used to study the effect of the cost of information dissemination on the competitiveness of the market and key industry aggregates, such as price distribution and the distribution of firm value. 2008 Elsevier B.V. All rights reserved. JEL classification: D80; L11; M37