Quality uncertainty and informative advertising
AbstractWe consider a single period model where a monopolist introduces a product of uncertain quality. Before pricing and informative advertising decisions take place, the producer observes the true quality of the good while consumers receive an independent signal which is correlated with the true quality of the product. We show that if advertising occurs in equilibrium, there must exist some pooling. We then characterize the constellations of parameters for which advertising occurs in equilibrium: For an advertising full pooling equilibrium to exist, (a) the consumers' valuation for the high quality must be high enough, (b) the informativeness of the market signal must be sufficiently low, (c) the costs of advertising must be high enough and (d) the consumers' priori probability of high quality must be sufficiently high. Existence of an advertising semi-separating equilibrium also requires the three first conditions but, in contrast, the consumers' a priori probability of high quality cannot be too large. When advertising occurs in equilibrium, the adverse selection problem is mitigated. Moreover, the lower are advertising costs, the more intense is the alleviation of that problem.
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Bibliographic InfoArticle provided by Elsevier in its journal International Journal of Industrial Organization.
Volume (Year): 18 (2000)
Issue (Month): 4 (May)
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Web page: http://www.elsevier.com/locate/inca/505551
Other versions of this item:
- Moraga González, José Luis, . "Quality uncetainty and informative advertising," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/6040, Universidad Carlos III de Madrid.
- José Luis Moraga-González, 1997. "Quality Uncertainty and Informative Advertising," CIE Discussion Papers 1997-19, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
- F15 - International Economics - - Trade - - - Economic Integration
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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