Econometrica: Sep 2008, Volume 76, Issue 5

Limited Information and Advertising in the U.S. Personal Computer Industry

https://doi.org/10.3982/ECTA4158
p. 1017-1074

Michelle Sovinsky Goeree

Traditional discrete‐choice models assume buyers are aware of all products for sale. In markets where products change rapidly, the full information assumption is untenable. I present a discrete‐choice model of limited consumer information, where advertising influences the set of products from which consumers choose to purchase. I apply the model to the U.S. personal computer market where top firms spend over $2 billion annually on advertising. I find estimated markups of 19% over production costs, where top firms advertise more than average and earn higher than average markups. High markups are explained to a large extent by informational asymmetries across consumers, where full information models predict markups of one‐fourth the magnitude. I find that estimated product demand curves are biased toward being too elastic under traditional models. I show how to use data on media exposure to improve estimated price elasticities in the absence of micro ad data.

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Supplemental Material

Supplement to "Limited Information and Advertising in the US Personal Computer Industry"

This supplement provides technical details of the data used to estimate the limited information model presented in the main paper.

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Supplement to "Limited Information and Advertising in the US Personal Computer Industry"

This supplement consists of three sections.  The first section presents a proof showing that the fixed-point algorithm is a contraction mapping.  The second section contains parameter estimates for alternative models discussed.  The third section illustrates why the full information and limited information models will (most likely) result in different estimates for price elasticities of demand.

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Supplement to "Limited Information and Advertising in the US Personal Computer Industry"

This zip file contains data and Fortran programs.

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