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Electronic Commerce Research, 1: 169–181 (2001)  2001 Kluwer Academic Publishers

Internet Advertising, Game Theory and Consumer Welfare
MARCUS CHI-HUNG LING marcus.ling@sunderland.ac.uk Visiting Lecturer, Sunderland Business School, St. Peter’s Campus, University of Sunderland, Sunderland, SR6 0DD, UK KEVIN LAWLER kevin.lawler@sunderland.ac.uk Reader in Industrial Economics, Sunderland Business School, University of Sunderland, Sunderland, SR6 0DD, UK

Abstract
The aim of this paper is to consider the implications of Internet advertising, for prospective consumer welfare gains/losses. The implications of imperfect information among buyers are discussed to highlight the role of intermediaries and search agents in enhancing consumer welfare in a world of complex products and uncertainty. The argument demonstrates that despite possessing welfare enhancing potential the retailing of complex products on the Internet increases the scope for price discrimination among sellers. Hence, buyers may pay different prices for the same product/services. The paper shows how “agents” may restrict this type of market failure if they possess the ability to search all databases. That the Internet intrinsically exhibits welfare enhancing and reducing characteristic a game model is develop to show how entry of new sellers may proceed or be checked by incumbents. Keywords: Internet advertising, game theory, consumer welfare, Internet economics

1. Introduction When the first Internet advertising came out around five years ago, the direct effects on sales were trivial. In recent years, firms spent increasing volumes of advertising resources on the Internet to develop e-commerce. The rising trend is phenomenal and is evident in growth rates, rising from $50 million in 1995 to $2.8 billion in 1999 (Table 1). The emerging effects created by Internet advertising are wide-ranging spanning different marketing strategies, which can be illustrated by the expected volume of trade via consumers and businesses (Table 2). In strategic terms, Internet advertising reduces barriers created by geography, thus facilitating the emergence of potential entrants and affecting traditional market shares. With respect to consumer choice, Internet advertising provides a tremendous extra impetus for firms wishing to practise product differentiation (Ling et al., 1997). Prices are normally vital parameters affecting choice. Ling et al. (1999) uses a game theoretical model to analyse Internet price regimes widely used by Internet retailers. The key implication of this multi-period game shows that time-constrained consumers form rational expectation about prices offered by different Internet retail outlets, and that agents try to

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Table 1. Internet advertising revenues. Source: Internet Advertising Bureau (IAB) 2000, + www.Internetnews.com/ On-line advertising (US$ million) 1995 1996 1997 1998 1999 2002 40 266.9 906.5 1,920 2,800* 6,500**

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* First three quarters total only. ** Forecast value.

Table 2. Transaction values via the Internet (US$ million). 1995∗ All Consumer Business 100 – – 1996** 500–600 – – 1998+ 32,000 11,200 20,800 2000∗ 168,000 – – 2002+ 425,000 93,500 331,500

Source: ∗ The World in 1997, p. 115. ** The Economist, May 10, 1997. + Nairn (1999).

employ different pricing/advertising strategies to match consumer expectations with price incentives and price-quality relationships. In the subsequent analysis, the major focus is on quality aspects and the economic implications of Internet advertising. A probability analysis is utilised to investigate how agents and firms may improve the expected payoffs (gains in quality) for consumers in an uncertain world. Furthermore, a game theoretical model is constructed to isolate strategic functions offered by Internet advertising assisting agents’ effort to boost sales. Finally, emergent roles for Internet auctions and advertising are considered. 2. Internet advertising, agent and trade On the Internet, numerous products with varying qualities are advertised and offered to consumers. However, Internet consumers are normally time-constrained and are puzzled by the vast matrix of qualities of goods on sale. Assume that there exists a range of products in a micro-segment environment all with identical selling prices but with different intrinsic qualities. Here quality refers to the “package” including elements such as product design, standard compliance, delivery, and after-sales services. Consumption via the Internet can be seen as a service facilitator when prices on offer are identical. Hence, the well-known Hotelling (1929) model of product differentiation may be applied in serviceoriented situations, where buyers are assumed to be equally distributed along a straight-line horizontal spectrum where firms are located in different territories to maximise sales. The model predicts that the greater the geographical distance between sellers and buyers, the

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higher the time/transaction cost required for delivery or, for waiting for deliveries, and this lowers consumer utilities. The implications of the spatial element are crucial for agent involved in competitive direct marketing via the Internet. For instance, Amazon.com recognises this spatial dimension and consequently has been actively expanding its network of warehouses. The ultimate aim of these outlets is to create a distribution network capable of selling and delivering any item requested by Internet consumers (Tett, 1999). In fact, the prerequisite for efficient delivery is particularly important in areas where consumers are already well served by efficient retailers and good communications infra-structure. At the same time, an efficient business environment implies that Internet retail agents have to face tougher competition being surrounded by traditional retail outlets especially in terms of service qualities and efficiency. On the Internet, consumers can search for different categories of goods and services. Nelson (1978) argues that experiential goods are more likely to be affected by advertising than search goods. This is the reason why traditional main media advertising focuses on non-durable and experiential goods/services. However, when advertising costs get cheaper, as advertising space is virtually unlimited on the Internet, there exists many potential opportunities for previously inactive and non-advertised product sectors to advertise on the Internet. However, when more advertising is conducted on the Internet, this creates problems of information overload for buyers. Common knowledge among consumers is extremely limited on the Internet where imperfect knowledge is likely to predominate. Thus, buyers face uncertainty and time-constrained problems when making purchases (Kreps, 1990). To model the informational problems confronting consumers given imperfect knowledge, a simple probability analysis is undertaken. The crucial idea in the example is consistent with the choices offered by used-car markets. Hence, due to lack of information about the true mechanical features of used cars, consumers are thrown into dark and so have to gamble when purchasing. Given that used cars with similar engine characteristics are grouped together, under an identical offer price. Despite the fact that these cars are different in certain quality aspects, sellers who advertise to attract Internet buyers not normally willing to give information on the true mechanical features of cars on offer. Consumers are therefore ignorant of quality levels and do not possess sufficient information to evaluate the potential reliability standards before delivery. This type of buying environment is seen at auction web sites and at used-product supermarkets on the Internet. Retail prices in this analysis are kept identical to facilitate comparisons. However, to reflect the varying levels of utilities to be gained by consumers, there exist different perceived buyer values. For instance, we assume that before making a purchase, buyers form the expected mean valuation of that £6000 matches a good quality used car and that £3000 represents a potential ‘lemon’ with low quality. If the market price for all used car models is £5000, consumers are drawn into a gamble. On one hand, if a used car turns out to be of good quality, the purchase is a bargain, representing a £1000 gain. On the other hand, buying a bad quality car results in losses of £2000. In this gambling situation, risk averse consumers will not purchase impulsively and will seek ways to improve their knowledge base. However, any buyers may not have sufficient information/time/ability to make a better choice. As economic search is costly and human beings are often restrained by time, consumers

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Table 3. Divergency of users and market values. Users perceived value £6000 £3000 Probability 1/3 2/3 Market price £5000 £5000

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Buyers perception Good quality Low Quality

may seek help from intermediaries – search agents, who posses higher levels of expertise and are exposed to more specialised buying techniques. Imagine a situation where an Internet intermediate agent obtains market research information regarding the probability of quality distribution (Table 3). Then they work out a “fair” value for a random purchase, which is £4000 (6000 · 1/3 + 3000 · 2/3). Based on the above “fair” value (£4000), the market price (£5000) implies an average gross profit of £1000 is made on every car sold at Internet site. However, buyers are disadvantaged if they are equipped with insufficient data. To improve payoffs, agents can investigate vehicle histories and make professional judgements accordingly. The agent’s intention is to search for a used car, which has quality at least equivalent to £5000 (good quality as expected by consumers). Obviously, agents can also bargain on behalf of consumers knowing that there is a divergence between the “fair” and market prices. However, price variables are not the major concern of this analysis. This analysis is a simplified picture of how consumers may be badly served with discriminating pricing practices, and how agents may operate between retailers and buyers. Inevitably, the values of probability distributions help predict market “fair” values. In reality, there are more quality variables forming the formulae for deducing a “fair” price and for other quality evaluations. Indeed, agents equipped with specialised information and marketing techniques will be attentive to special features relating to an optimal consumption choice such as product durability, brand quality, ISO standards and maintenance. The key role played by agents essentially transforms time-constrained consumers into non-time constrained buyers or, eliminates consumer ignorance of potential choices. Agents possess complex databases of quality performance indicators for ranges of products. For instance, within a specific market subsegment, when consumers specify a range of prospective purchase prices, agents then utilise search technologies to select the mechanise with the highest quality rating. Without such systems organised by search agents, consumers are likely to trade-off time saved against lower merchandise quality. Assuming that the probability distribution in the previous example was reversed between the two quality categories, the resulting “fair” price becomes £5000 (6000 · 2/3 + 3000 · 1/3), which is exactly the same as the market price. If consumers accept to pay this market rate, the role of agents is to ensure that the purchased car is of good quality. This demonstrates the potential welfareenhancing role played by intermediate agents. The issue of incomplete buyer information is crucial for e-commerce, particularly if consumers are sensitive to product quality variations. In traditional economic models, asymmetric information problems normally do not apply to suppliers, hence suppliers on Internet may play a dual role in retailing competition. On one hand, they advertise as much information as possible to match consumer expectations effectively, whereas, on the other hand, they may conceal vital information as evident in the used-car market example; or, they may focus on advertising favourable quality dimensions to motivate sales. Thus, sell-

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ers may advertise to strengthen brand image and implicit by-products, such as “goodwill” and generic brand quality. These countervailing economic features arise from the informative and persuasive elements in the advertising process.1 The former is regarded as welfare enhancing while the latter may be wasteful in resources. The two conflicting advertising influences are becoming common on the Internet as sellers invest ever-increasing volumes of advertising outlays at the expense of more traditional advertising media (Ling et al., 1999). The persuasive aspects of advertising are strategically employed to strengthen “brands” and retail value. The “quality” element created by Internet advertising is the “perceived” quality derived from inherited brand “reputation”, recognition and prestige. According to Kreps and Wilson (1982), reputation effects can be easily established. Logically, therefore, the heavier the target advertising becomes the more favourable the perceived quality rating. Consequently, persuasive advertising tends to pull consumers nearer to advertised brands and further away from rival products with less attached advertising. If advertising via the Internet is utilised optimally and follows certain strategic patterns, some firms are likely to eliminate rivals or obtain higher market shares.

3. A game model for optimal advertising and product entry To examine the realistic interactions between a set of close competitors, a game theoretical approach is employed in the following section. This approaches follows zero-sum game principles, which is a close reflection of a mature market rivalry (Kreps, 1991). This analytical approach here allows for the concept of strategic groups to prevail and the product heterogeneity to exist. The game model demonstrated below aims to indicate the optimal allocation of advertising outlays in competitive environments with common knowledge of the prospects of profitable entry. This model enables arch rivals, with equal financial strength to tailor advertising strategies to maximise returns in target markets. The following resource matrix represents the “knowledge” of common competitive strategic conditions in the industry. Realising that an established firm cannot always defend all product categories in the market, potential entrants have an incentive to get into any possible market gap and make profits. To simplify the real world and concentrate on target segments, the model assumes that an incumbent produces two products T1 and T2, yielding a constant unit return of M1 and M2, respectively. Incumbent, however, usually possess more market information and expertise, which allows them to take more exact control over strategic moves. Profit-driven incumbents will choose to maximise returns by concentrating advertising on a product with higher profitability, leaving potential entrants with a credible threat, which minimises their prospects of fruitful entry. This condition is compatible with a classical two player zero sum game. To avoid unnecessary clashes into the incumbent’s target product area, rational
1 The two major economic characters of advertising are supported by two polarised schools of thought.

Stigler (1961), Telser (1964) and Nelson (1974) stress those informative functions of advertising. While Comanor and Wilson (1967), Schmalensee (1972) and Lambin (1976) employ a persuasive view on advertising.

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Table 4. An advertising investment matrix. Entrant e A−e Incumbent i A−i

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Target products T1 T2

Note: e and i refer to volume of advertising investment (units), A refers to total advertising resource.

Figure 1. The expected payoff for the entrant in product area T1.

entrants tend to take actions after an incumbent does. The potential entrants are followers in a multistage game. If M1 > M2, the incumbent will invest i to enhance sales of T1, allowing A − i for T2 (Table 4). This implicitly assumes that incumbent takes the first move and entrants react accordingly based on observed market potential, thus, If i > e, then A − e > A − I. (1)

This implies entrant obtains a payoff of (A − e) − (A − i) M2 = (i − e)M2. (2)

Note. The payoff is assumed to be a multiple of the unit of successful advertising messages (e − i) and the marginal rate of return of advertising messages (M). If an entrant becomes aggressive, with an intention to dominate product market T1, it needs to create sufficient successful advertising messages to eliminate the advertising impact from the incumbent, hence, for e > i, the resulting payoff = (e − i)M1. M1(e − i), if e > i, M2(i − e), if e < i. (3)

Therefore, the overall expected payoff for the entrant is shown as follows: E(e, i) = (4)

Figure 1 shows the payoff matrix for an entrant using a convex function of E(e, i). This indicates that an entrant can get a positive payoff from product from T1, providing its advertising investment volume is above i. However, the primary objective of the incumbent

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is to minimise the payoff of potential entrants. This means the incumbent needs to identify its strategic investment for minimising M2(i) and M1(A − i). At i, M2(i) = M1(A − i) ⇒ M2(i) + M1(i) = M1 · A ⇒ i = M1 · A/(M1 + M2). investment i ∗ (5) The location of i in Figure 1 refers to the optimal = M1 · A/(M1 + M2) for defending incumbent’s product territory T1. Based on this probability indicator, the corresponding optimal investment for T2 is M2 · A/(M1 + M2). The model enjoys some degree of flexibility. As profitability changes among product alternatives, the relative ratio [M1/(M1 + M2)] adjusts accordingly to indicate new optimal allocations of advertising outlays among different products. With an optimal strategic advertising game model, incumbents can work out a detailed strategic action plan, which is consistent with the fundamental economic principle of maximising the expected returns in major product areas.

4. Further analysis The use of a game model is to demonstrate that competitions between advertising agents are rational. They act and react with respect to each other’s actions. Advertising very often can affect pricing. Moreover, the cost of advertising can be passed onto consumers. This means that rising competition via expansion of advertising outlays can result in escalating pricing if players cannot optimize their advertising budgets. From the point of view of consumers, unlimited increase in competition via advertising can be socially wasteful, too. Ironically, advertising can be very costly to firms. Hence, continuous up-scaling of advertising may not be financially viable for firms with smaller marketing budgets. This motivates market players to use advertising budgets strategically in order to trigger different expected responses from market players. Hence, each agent can be expected to act in accordance with certain strategic patterns following game model interactions as described in the previous section. The intention of players for this type of game model is to maximise market share. However, the welfare status of consumers is largely neglected. Internet advertising emerges as a break-though in terms of provision of informative data. Before the Internet era, due to the constraints imposed by the lack of efficiency of information exchange and diffusion, asymmetric and imperfect information were the biggest barriers for bridging buyers and sellers. With more intermediate agents serving as filtering processors for final data users, the welfare implications of advertising on the Internet become more difficult to be evaluated. This is because quality aspects of advertised merchandises cannot be easily determined by Internet users and even intermediate agents in the short run. Moreover, with the problem of information overload, consumers may collect more irrelevant information and formulate undesirable expectation which may affect their judgement and rational expectation. In the market place, it is common that a seller provides more than one category or type of goods. For instance, big international brewers have been utilising heavy advertising

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budget for advancing their market shares. Ling (1998) illustrates brewers can employ advertising to establish long run accumulative effect on sales. Given the fact that brewers are not selling a single type of beer products, their marketing forces have to deal with a proliferation of beers offering for beer drinkers. In terms of market share competition, each of these international brewers is aiming to enhance their existing market share and at the same time each is actively exploring new market potential to strengthen the aggregate market portfolio. With the growth of Internet advertising, many big players have been placing huge budget for the creation of Internet advertising influences, such as famous brewers like Guinness, Heineken and Asahi. This type of non-price competition, to certain extent, can create puzzling effects on consumption. However, at the same time, Internet advertising represents a strategic influence to deter or accommodate market entry. As said, the nature of Internet advertising is largely divided into two main categories, one is to highlight its persuasive power for pulling in consumers, while the other is to give better information with respect to advertised products. The role of intermediate agents is more significant for the latter as information expertise can facilitate the execution of consumption and enhance the value derived from prospective consumption. Assuming that human beings are constrained by time, the role of intermediate agents can consequently increase the welfare of consumers by providing value-added services for consumers. The process represents a transformation of consumption mode from time-constrained to nontime-constrained. Of course, in our business world, there is a value attached to the respective transformation. Rational consumers requesting services from intermediate agents are supposed to gain a benefit which exceeds, or at most equal to, the cost paid to an agent. Simply, this also represents an improvement of social welfare and in simple term a gain in time cost. For services or consumption processes which can allow the ease of comparison on prices, such as beer prices between international brewers, the role of intermediate agents is less significant. However, market players can utilise Internet advertising to reach certain strategic objectives which will be examined in the following section. Concerning the welfare implication of the Internet advertising of the N-product case, the resulting market performance may limit the dimension of future competition. Therefore, Internet can create changing market environment for market players and the structure of competition. These eventually can introduce changing welfare implications such as choice availability and the possibility of practising price discrimination.

5. N -product case In actual markets, firms usually produce more than one product. With increasing use of product differentiation strategy to penetrate market gaps, a more advanced analysis for sophisticated interactions between product groupings is required. For N-product case, the above theoretical concepts are employed. When an incumbent intends to allocate advertising resources QC for N-products, namely C1 , C2 , . . . , CN , these products also assigned relative profitability values (i.e., the constant marginal return), namely M1 , M2 , . . . , MN , respectively, and where profit indices are arranged in such a way that 0 < M1 < M2 · · · < MN . Assuming that an entrant has QE units of advertising outlay

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for promoting target products, namely E1 , E2 , . . . , EN , and QC > QE . The entrant is expected to use a strategy such that, Ei = QE , for i = 1, . . . , N. Similarly, the incumbent will employ a strategy which is of the same format, such that Ci = QC , for i = 1, . . . , N. In economic terms, the resource allocation for each of the C is is to give a best response for each incumbent’s product against the entrant’s attack. The model requires more realistic assumptions if an N-product case is employed for strategic game predictions. First, one unit of incumbent advertising outlay is equivalent to one unit of entrant advertising in terms of absolute advertising influence on sales. The effect of advertising on competitor’s sales is countervailing. The countervailing remaining influence depends on the volume of outnumbering units of advertising outlays. To measure successful market penetration power, the higher the number of non-matched attacking messages, the better the resulting penetrating forces to gain market share from the incumbent. Secondly, the payoff for a player is the sum of the resulting penetrations for each of the target products. Hence, for an entrant with products E1 , . . . , EN , the expected payoff is E(EC) = Mi max(0, Ei − Ci ), for i = 1, . . . , N, where, Ei ≥ 0, Ci ≥ 0, Ei = QE and Ci = QC , for i = 1, . . . , N. The resulting outcome is determined by the convex function of E(EC) in C for each E and vice versa. Consequently, the optimal solution consists of a pure strategy for incumbent and a mixed strategy for the entrant. A point consistent with some empirical studies is that since each entrant uses a mixed strategy, it is therefore not rational to attack low profitability product groups. Instead, entrants usually employ random selection strategies and put entire budgets on single products to create greater “outnumbering messages”. In response, the incumbent will always defend the high return product grouping and leave low return items with less protection. If the game is played optimally, incumbent will stay in the market presenting no soft targets for potential entrants. As argued by Friedman (1977), the incumbent must defend her market against a significant attack from a single entrant. Ironically, there appears to be chances for entrants in the markets with low returns, however, entrants will obtain less than the value of game if they attack these. With the information on M1 , M2 , . . . , MN , the precise solutions for optimal allocation of advertising can be calculated. In utilising game models and the concept of optimal advertising, a computer programme was generated for calculating the precise figures for resources used in an entry deterrence game. The simulation results indicate that the Gaussian technique for solving simultaneous systems is able to determine optimal game solutions. This provides more potential avenues for future research in this area.

6. The emerging role of internet commerce The on-line auction web site, e-Bay attracted sales of $307 million in the last three quarters of 1998 and its popularity is expected to achieve $3.2 billion sales in 2002 (Taylor, 1999).2 Rather than providing listed prices for products, this Web site allows people to auction
2 The auction business via the Internet is expected to experience healthy growth as this line of business has

low overheads. In 1998 e-Bay enjoyed gross margins as high as 86% and unlike other on-line businesses, it discovered opportunities for profit and achieved a net income of $19.5 M (Taylor, 1999).

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goods and the web sites invite bids from interested parties. The advertising process on this site is more or less like classified newspaper advertisements, which facilitate the exchange of goods and services. The buying environment allows more negotiation compared to traditional retail markets. The goods sold via this auction site go to the highest bidder. This implies traded prices are set by the highest offer made by potential buyers for every period when offers are agreed. Bakos (1998) argues that web-based auctions reverse the traditional functions of retail markets. Certainly, they provide more complicated matching processes for demand and supply. Apart from e-Bay, there are many other on-line auction sites. For instance, last-minute unsold air-tickets are auctioned by airlines; thus Onsale.com carries out on-line auctions in a way similar to financial markets; moreover, Priceline allows prospective bidders to specify requirements for the goods they intend to buy and place offers for auctioned good with participating sellers. In a world puzzled by uncertainty and imperfect information, this auction channel actually converts Internet advertising information into a more powerful strategic tool enhancing the practice of price discrimination. From economic welfare principles, enhanced discriminatory power results in reductions of consumer surplus and increases in sellers’ profits. However, auctions are an efficient way for solving negotiations in one-to many situations. Binmore (1985) uses sequential negotiation processes to demonstrate results of negotiations between rational economic agents recorded at auctions. When transaction costs especially time and communication costs are substantial, auctions eliminate unnecessary inefficiency in retail markets. In the case of auctions with reservation prices, Riley and Samuelson (1981) and Myerson (1981) argue that no matter how many bidders exist, sellers impose minimum reservation prices above true values. This phenomenon tends to move equilibrium auction prices away from true equilibria, thus reducing the overall efficiency of market institutions. Levin and Smith (1996) argue that competition should serve to enhance the efficiency of auctions and to reduce sellers’ incentives to deviate from the efficient valuations. In their earlier studies, Levin and Smith (1994) showed that at auctions with sufficient entry, sellers have no economic incentive to overstate true reservation prices. Due to the fact that Internet commerce focuses on personalisation and customisation services, bargaining processes are essential in determining the payoffs for parties involved in transactions, especially for one-to-one negotiations. The extent to which consumes surplus is extracted depends on the types of bargain, levels of competitive responsiveness and key knowledge of the players. Game theoretical principles can be applied to the bargaining process over the Internet. Relative strengths in bargaining are determined by the relative levels of data owned by parties to the negotiation. The second aspect of a bargaining game concerns the time duration. In most cases in the Internet trade, counter-offers are possible between traded parties. The use of strategic delays in the bargaining game can be employed to signal strengths in the negotiation process. This concept was first introduced by Admati and Perry (1987). The use of counter-offers implies that it is possible to generate a series of sequential equilibria during the complex bargaining process as in the models studied by Chatterjee and Samulson (1987). Stronger agents simply wait (strategic delays) for the weak opponent to reply (crack) and then reveal choices, preferences and other decisive elements for the bargain. The number of rounds in the bargaining process depends

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on the number of elements needed to be revealed until an opponent cracks. This is typical in one-to-one bargaining processes. In welfare terms, consumers always welcome an “efficient deal” with the lower transaction time costs. In fact this is a crucial service “quality” offered intermediaries. For a one-to-many bargaining regime, the situation is similar to auction trades on-line. If the seller invites bids for specific contracts of services, the contract falls to the bidder with the best price. However, if the traded good is specific, search and negotiation are carried out simultaneously, until equilibrium price is reached. In general, sellers may control bargaining processes as they have power to screen all prospective buyers and practise price discrimination implicitly. This may be the reason why prices on Internet are not necessarily lower than goods transacted via traditional retail markets. Bailey and Brynjolfsson (1997) find little evidence to support the existence of lower prices in the Internet trading environment compared to normal retail outlets. However, shorter transaction times can be regarded as better quality service provided by the Internet. Moreover, Milgrom (1987) argues that if sellers are able to re-offer an unsold item, there are incentives for them to overstate true values. The sheer size of the Internet marketplace makes it easy to attract potential buyers. This motivates sellers to set reservation prices above the true values, resulting in market failures in some auction markets. However, when the number of bidders falls short of expected/pre-determined levels, reservation prices may be adjusted downwards creating a “flexible reserve” phenomenon as illustrated by Smith (1989). Hence, overstating true product values are not likely in these cases. Smith (1996) argues that auction prices based on “flexible reserve systems” usually relate to objects that have obvious ‘common’ or affiliated values. When the number of similar websites increases, the bidding processes and bargaining operations become more competitive. Buyers accumulate more knowledge and form better judgements about assessing market values for good/services sold via the Internet. Therefore, the price of goods sold via these Internet auction web sites should not deviate much from the “perceived” market values in the long run. With regards to Internet commerce utilising agents, Vulkan (1999) argues that there exist suppliers who do not allow their sites to be interrogated by search agents. The technical limitation of inaccessibility restricts the possibility of searching genuine low prices, or better quality services. To a large extent, Internet developments are consumer-driven phenomena. However, central to the potential successes of smart agent Internet shopping are supply-side retailers attitudes towards smart agents. For instance, Yovovich (1995) argues on-line retailers are not amenable to smart search agents entering in their databases.

7. Conclusions The paper has examined the role of imperfect information and “agents” where buyers are time constrained. The potential for the Internet to transform the “knowledge” environment for buyers is clearly cost. However, Internet advertising—like other forms—possesses “persuasive” and informative features. These enhance or reduce consumer welfare potential. Where buyer information is limited, and where common knowledge is restricted the key role of Internet “search agents” is shown a balance to be likely to be welfare in-

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creasing. As e-commerce develop the linkages between retailers, agents and consumers may become more complex. Generally, in the long run, as the “knowledge domain” of consumer increases via Internet activity agents will perform a key “quality” service for buyers by matching prices, consumer expectations with “quality” sellers. Profit maximising search agents who fail to do this consistently for consumers with rational expectations will go bankrupt. The consumer driven philosophy of the Internet e-commerce activity will be the dominating feature in Net development in the next five years. References
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Marcus Ling is a project manager at the Asia Marketing Intelligence Business Consulting in Hong Kong. He is an Applied Economist who has a considerable number of publications on Internet Advertising, the Telecommunications Market, South East Asian Economics and UK Brewing. Dr. Ling worked as a Visiting Lecturer at the University of Sunderland in the UK since 1993. Recently, he has contributed to various chapters to three texts for both undergraduate and post-graduate students.

Kewin Lawler is a Reader in Industrial Economics at the University of Sunderland. His research interests cover all areas of econometrics, especially those connected with application of game theory. He has recently published two texts in these areas. He has supervised a large number of PhD candidates in Economics and Business.