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In their seminal paper "Informative Advertising with Differentiated Products," Grossman and Shapiro (1984) find that informative advertising is overprovided relative to the social optimum when products are differentiated and the number of firms is sufficiently large. This finding rests on a crucial assumption: consumers are passive in that they do not engage in any information acquisition activities. In this paper, I analyze the implications of introducing consumer search into Grossman and Shapiro's model. When consumers are ex-ante unaware of product existence, they do not consider search until they receive an advertisement. The first ad they receive raises awareness about the existence of a market for the advertised product and initiates a potential search. However, they do not know if there are any other firms in the market nor do they know if it is a differentiated good. So, one needs to define a theory for how beliefs evolve to address these issues. I take a simple approach in this paper and assume that search is costless. Two firms randomly send their ads in order to inform consumers about the existence, the characteristics and the price of the brand they sell. If consumers are fully rational, exposure to a single ad enables them to obtain complete information about the whole market since it raises awareness about the existence of such a good. I find that firms charge a lower price in a symmetric equilibrium compared to Grossman and Shapiro (1984), and undersupply advertising relative to the social optimum because of free- riding on advertising. I then introduce "ignorant" consumers who ignore the possibility that other firms exist when contacted with only one firm's ad containing a price that only a monopolist would choose. If, on the other hand, the ad contains a price that a monopolist would not choose, these ignorant consumers infer that the market is not served by a single firm. Therefore, they conduct a search and find out all the relevant market information. When all consumers are ignorant, I find that there exists a symmetric equilibrium in which firms charge the monopoly price and possibly undersupply advertising relative to the social optimum. These findings are in sharp contrast to those of Grossman and Shapiro (1984). The result that monopoly pricing arises may seem to have been driven by the assumption of ignorant consumers. However, I have made this assumption just to get a nontrivial equilibrium in the presence of costless search. In fact, the same pricing strategy should carry over to other, economically more reasonable, specifications. Suppose that search is costly and that consumers are rational. Upon exposure to an ad, they form beliefs about the fixed cost of producing such a good. For simplicity, suppose that they postulate three possible values for the fixed cost: a low value which would accommodate only one firm, a moderate value which would accommodate two firms, or a high value which would accommodate three firms. Suppose also that they postulate a uniform distribution for the possible variations of the advertised good. Then, depending on the advertised price(s), consumers make rational inferences, and accordingly decide

Informative Advertising and Consumer Search in a Differentiated-Products Duopoly