Abstract
This paper studies a directed search model where sellers have limited capacities, and buyers cannot observe the varying number of advertisements each seller sends. In the presence of this asymmetric information, the limit purchase and selling probabilities as the market size increases are derived. The limit equilibrium is fully separating, where sellers with low advertisement intensity choose a lower price to signal. The equilibrium is not constrained inefficient, and equilibrium welfare is higher either when advertisements are highly costly or free. Buyers are better off in equilibrium than in the efficient allocation due to the lower price and benefit from more expensive advertisements.
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I thank the editor and two anonymous referees whose comments significantly improved the quality of this paper. I also thank John Kim, Junjie Guo, Seokjong Ryu, Soomin Jung and seminar participants at Asian Meeting of Econometric Society (2021), Chinese Meeting of Econometric Society (2021), and Chinese International Conference in Macroeconomics (2021) for their comments and suggestions. All errors are mine.
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Moon, JW. Hidden advertisement, signaling, and directed search. Econ Theory (2023). https://doi.org/10.1007/s00199-023-01542-9
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DOI: https://doi.org/10.1007/s00199-023-01542-9