The influence of media attention on retail price competition

Media attention on price differences between firms is common, e.g., media comparisons of supermarket grocery prices. We consider the effect of such comparisons on competition between sellers in a simple two-period spatial model. When some consumers are uninformed about current prices, media price comparisons provide information which can directly intensify competition. Furthermore, firms that do well in price comparisons can experience an increase in demand for their product over time; to what extent they reap the rewards of this by increasing prices in the future, depends on how likely they regard further price comparisons. Current media attention thus has a contemporaneous effect and an intertemporal one. Each firm is aware of this, and takes into account that due to media attention, an aggressive pricing policy may have effects similar to informative advertising in the current period and to persuasive advertising in the future. We seek to disentangle these effects on price competition in a model where media attention takes place stochastically, and in which some consumers are initially uniformed and sellers can initially have different reputations for adopting a low-price profile. Moreover, we present conditions under which media attention creates a snowball effect in which the current winner remains a low-price seller over time, and under which the victor will be expected to alternate. Both patterns are observed in practice.