The Econometric SocietyEconometrica: 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.Log In To View Full Content