This paper endogenizes both market transparency and product differentiation in a model of informative advertising á la Grossman and Shapiro (1984). We find, contrary to Schultz (2004), that an increase in market transparency raises firm profits but has no effect on product differentiation. We also find that a move from exogenous to endogenous market transparency is detrimental to welfare. Compared to the Grossman and Shapiro model, with endogenous product differentiation, firms advertise more, differentiate their products more, charge higher prices and earn higher profits when the advertising cost is “not too low”. This is because endogenizing product differentiation relaxes price competition when the advertising cost is not too low.
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