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Advertising, quality, and willingness-to-pay: Experimental examination of signaling theory

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  • Tsui, Hsiao-Chien
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    Abstract

    According to the quality signaling theory, firms are motivated to invest more advertising in high-quality products. This paper conducts an experiment through a closed-ended double-bounded dichotomous choice of the contingent valuation method to measure consumer willingness-to-pay for a fictitious cell phone market of varying quality before and after advertising. The results show that advertising effectively influences consumer awareness of perceived quality and enhance their WTP. The results also suggest that even though the high- and low-quality products differ in the investment of advertising, the effect of advertising on the increase in consumer WTP for low-quality products as well as for high-quality products.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Psychology.

    Volume (Year): 33 (2012)
    Issue (Month): 6 ()
    Pages: 1193-1203

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    Handle: RePEc:eee:joepsy:v:33:y:2012:i:6:p:1193-1203

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    Web page: http://www.elsevier.com/locate/joep

    Related research

    Keywords: Advertising effect; Quality; Willingness-to-pay; Contingent valuation method;

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    References

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    1. Cameron, Trudy Ann & James, Michelle D, 1987. "Efficient Estimation Methods for "Closed-ended' Contingent Valuation Surveys," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 269-76, May.
    2. Schmalensee, Richard, 1978. "A Model of Advertising and Product Quality," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 485-503, June.
    3. Kirmani, Amna & Wright, Peter, 1989. " Money Talks: Perceived Advertising Expense and Expected Product Quality," Journal of Consumer Research, University of Chicago Press, vol. 16(3), pages 344-53, December.
    4. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 647-58, October.
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    6. Berrens, Robert P. & Bohara, Alok K. & Jenkins-Smith, Hank C. & Silva, Carol L. & Weimer, David L., 2004. "Information and effort in contingent valuation surveys: application to global climate change using national internet samples," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 331-363, March.
    7. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    8. Dittmar, Helga & Beattie, Jane & Friese, Susanne, 1995. "Gender identity and material symbols: Objects and decision considerations in impulse purchases," Journal of Economic Psychology, Elsevier, vol. 16(3), pages 491-511, September.
    9. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
    10. Fluet, Claude & Garella, Paolo G., 2002. "Advertising and prices as signals of quality in a regime of price rivalry," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 907-930, September.
    11. Kanninen Barbara J., 1995. "Bias in Discrete Response Contingent Valuation," Journal of Environmental Economics and Management, Elsevier, vol. 28(1), pages 114-125, January.
    12. Caves, Richard E. & Greene, David P., 1996. "Brands' quality levels, prices, and advertising outlays: empirical evidence on signals and information costs," International Journal of Industrial Organization, Elsevier, vol. 14(1), pages 29-52.
    13. Kirmani, Amna, 1990. " The Effect of Perceived Advertising Costs on Brand Perceptions," Journal of Consumer Research, University of Chicago Press, vol. 17(2), pages 160-71, September.
    14. Hoehn, John P. & Randall, Alan, 1987. "A satisfactory benefit cost indicator from contingent valuation," Journal of Environmental Economics and Management, Elsevier, vol. 14(3), pages 226-247, September.
    15. Anna Alberini, 1995. "Testing Willingness-to-Pay Models of Discrete Choice Contingent Valuation Survey Data," Land Economics, University of Wisconsin Press, vol. 71(1), pages 83-95.
    16. Hao Zhao, 2000. "Raising Awareness and Signaling Quality to Uninformed Consumers: A Price-Advertising Model," Marketing Science, INFORMS, vol. 19(4), pages 390-396, January.
    17. Azar, Ofer H., 2011. "Do people think about absolute or relative price differences when choosing between substitute goods?," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 450-457, June.
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