Advertising intensity and welfare in an equilibrium search model

- I analyze a consumer search model where firms can advertise by announcing price.
- I examine the firm advertising level relative to that of a social planner.
- Firms over-advertise if search costs are sufficiently low.
- Firms under-advertise if search costs are sufficiently high.

I analyze an equilibrium search model in a duopoly setting with bilateral heterogeneities in production and search costs in which firms can advertise by announcing price. I compare the market advertising level to the socially optimal level, where I find that costly search can improve welfare and that firms may under- or over-advertise relative to the social optimum depending on the costs of search. The results suggest that, in markets with sufficiently low search costs, firms are likely over-advertising relative to the socially optimal level, and vice versa for markets with sufficiently high search costs.