SIGNALING PRICE IMAGE USING ADVERTISED PRICES

This paper addresses the issue of retail price image by offering an ex planation for how and when stores can use their advertised prices to s ignal the prices of other products in the store. A model of a two-prod uct retail market is presented in which stores advertise the price of one product and customers do not know the price of the other product b efore selecting which store to visit. In a model with full customer in formation, stores with different marginal costs charge. different pric es for each product When customers do not know each store's marginal c ost type, an opportunity arises for each store to signal its cost type using its advertised prices. In such a model additional equilibria ex ist. In particular, stores with different costs may charge the same ad vertised price while continuing to charge different prices for the una dvertised product. Data from competing drycleaning stores is generally consistent with the model predictions. A number of additional propert ies of the equilibria are discussed and possible extensions to the mod el are proposed.