A Dynamic Model of Advertising

Abstract

This paper analyses the incentives for firms to advertise the price they charge for a product to imperfectly informed consumers. I find that firms do have an incentive to advertise their price. Furthermore, when the consumers are sufficiently flexible in their timing of purchases, the resultant equilibrium is a contestable equilibrium. This continues to be true even if there are such costs, so long as these costs are smaller than the cost of advertising.