Two gasoline stations at the Orlando airport refuse to post their prices, despite the attempts of the city of Orlando to force them to to so. You can easily guess why:
The logic is clear. If you promote your product by advertising the price, you make demand more elastic, so you should reduce price. BUT, if you expect your competitor to follow suit, then you will end up in an "advertising dilemma," a version of the prisoners' dilemma.
HT: Matthew Binkley
Related paper: Tenn, Steven,Luke Froeb , and Steven Tschantz, Merger Effects When Firms Compete by Choosing Both Price and Promotion, International Journal of Industrial Organization (in press). Available at IJIO or SSRN.
When Terrence Smith climbed out of his rental car at the Suncoast Energys gas station near Orlando International Airport on Friday, he couldn't believe the $5.79-per-gallon price displayed on the pump.
The Atlanta man remembered paying about $3.65 at other stations during the week he vacationed with his wife in Orlando. "In Atlanta, you might see 15 or 20 cents more near the airport, but $2 is ridiculous," he said.
The logic is clear. If you promote your product by advertising the price, you make demand more elastic, so you should reduce price. BUT, if you expect your competitor to follow suit, then you will end up in an "advertising dilemma," a version of the prisoners' dilemma.
HT: Matthew Binkley
Related paper: Tenn, Steven,
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