Competition with an Information Clearinghouse and Asymmetric Firms: Why More than Two Firms Compete (or not) for Shoppers

Abstract We characterize equilibria of a market in which firms with asymmetric loyal customer bases can pay a fixed cost to advertise prices through an information clearinghouse to compete for shoppers. We find that the magnitude of the advertising cost and differences in the sizes of the firms' loyal market shares are critical in determining which firms compete for shoppers in equilibrium. If the advertising cost is sufficiently low, then only the two firms with the smallest loyal market shares advertise and compete for shoppers. However, in contrast to earlier literature, more than two firms compete for shoppers if the advertising cost is sufficiently large and the difference in loyal market shares is sufficiently small. In addition, the advertising probability decreases in the size of the firm's loyal customer base, but larger firms price more competitively when they do advertise.