| Abstract: |
We model a homogeneous product environment where identical e-retailers
endogenously engage in both brand advertising (to create loyal customers) and
price advertising (to attract 'shoppers'). Our analysis allows for
'cross-channel' effects; indeed, we show that price advertising is a
substitute for brand advertising. In contrast to models where loyalty is
exogenous, these cross-channel effects lead to a continuum of symmetric
equilibria; however, the set of equilibria converges to a unique equilibrium
as the number of potential e-retailers grows arbitrarily large. Price
dispersion is a key feature of all of these equilibria, including the limit
equilibrium. While each firm finds it optimal to advertise its brand in an
attempt to 'grow' its base of loyal customers, in equilibrium, branding (1)
reduces firm profits, (2) increases prices paid by loyals and shoppers, and
(3) adversely affects gatekeepers operating price comparison sites. Branding
also tightens the range of prices and reduces the value of the price
information provided by a comparison site. Using data from a price comparison
site, we test several predictions of the model. |