Going Where the Ad Leads You

The search literature assumes that consumers know which firms sell products they are looking for, but are unaware of the particular variety and the prices at which each firm sells. In this paper, we consider the situation where consumers are uncertain whether a firm carries the product at all by proposing a model where in the first stage firms decide on whether or not to carry the product. Firms may advertise, informing consumers not only of the price they charge, but also of the basic fact that they sell the product. In this way, advertising lowers the expected search cost. We show that this role of advertising can lead to a situation where advertised prices are higher than non advertised prices in equilibrium