An Experimental Study of Price Dispersion in a Search Model with Advertising

This paper reports a laboratory experiment to study pricing and advertising behavior in a market with costly buyer search. Sellers simultaneously post prices and decide whether or not to incur an exogenous cost to advertise their price. Sellers are not capacity constrained, and each buyer demands one unit per period. In the unique symmetric equilibrium, firms either charge a high unadvertised price or randomize in an interval of lower advertised prices. Theory predicts that increases in either search or advertising costs are reflected in higher equilibrium prices. To test the predictions regarding the level and dispersion of prices and advertising intensity, we vary the costs of search and advertising as well as the number and type (human or robot) of buyers. Our preliminary results support the model’s comparative static predictions, particularly with robot buyers. Sellers facing robot buyers also post high unadvertised prices as predicted. In all treatments, however, sellers advertise more intensely than the model predicts. When combined with the unexpectedly high search intensity of the human buyers, this advertising leads to strongly competitive pricing that is inconsistent with the theory