Abstract
This paper studies the incentives for a monopolistic Örm producing a good with network externalities to advertise when consumers face imperfect information and therefore must search to realize their actual willingness to pay for the good. A Örm may disclose market information through advertising if it Önds it beneÖcial.
The results suggest that advertising is more likely in the case of a negative network e§ect and less likely with a positive network effect. When a monopolist faces a strong network externality, it chooses to support the maximum possible network and charge a price equal to the value of the externality.
Finally, depending on the value of the search cost and type of network externality, a monopolist may use di§erent advertising content: no information, price information only, product characteristics, or both price and product characteristics. SpeciÖcally, if all consumers have the same search cost, as the search cost grows the Örm must include more information in the advertising content, while as the network externality changes from negative to positive, the Örm reduces the content.
In contrast, if consumers differ in their search costs, the Örm tends to provide more information as the externality changes from negative to positive.