An experimental study of price dispersion in an optimal search model with advertising

This paper reports a laboratory experiment to study pricing and advertising behavior with costly buyer search. Sellers simultaneously post prices and may incur a cost to advertise this price. In the unique symmetric equilibrium, sellers either charge a high unadvertised price or randomize in an interval of lower advertised prices. Increases in search or advertising costs raise equilibrium prices, and equilibrium advertising intensity decreases with lower search costs and higher advertising costs. Our experimental results support these comparative static predictions, and sellers also post high unadvertised prices as predicted. In all treatments, however, sellers advertise more intensely than in equilibrium. D 2005 Elsevier B.V. All rights reserved. JEL classification: D43; D83; L13