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Advertising, Consumer Information, and Product Quality

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  • Yehuda Kotowitz
  • Frank Mathewson
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    Abstract

    This article analyzes a monopolist's quality and advertising policies and evaluates their social optimality. Our model considers a rational, though not fully informed, consumer who holds prior perceptions about aspects of quality, which determine his purchase pattern. These quality perceptions constitute the product's goodwill. Differences between expected and experienced quality lead to reevaluation of expectations. Monopolists affect these perceptions, and hence build up goodwill, by advertising and quality attribute variations. These affect consumer welfare directly and indirectly by their informational content. We find that advertising may profitably mislead, at least in the short run. Although the welfare effects of a monopolist's quality and advertising policies are not generally determinate, even when information is untrue, we are able to evaluate the welfare determinants of advertising policy from an objective standard and to specify some of the conditions under which advertising is socially excessive.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 10 (1979)
    Issue (Month): 2 (Autumn)
    Pages: 566-588

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    Handle: RePEc:rje:bellje:v:10:y:1979:i:autumn:p:566-588

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    Web page: http://www.rje.org

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    Web: https://editorialexpress.com/cgi-bin/rje_online.cgi

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    Cited by:
    1. L. Lambertini, 2001. "Dynamic Duopoly with Vertical Differentiation," Working Papers 396, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Eftichios Sartzetakis & Anastasios Xepapadeas & Emmanuel Petrakis, . "The role of information provision as a policy instrument to supplement environmental taxes: Empowering consumers to choose optimally," DEOS Working Papers 1012, Athens University of Economics and Business.
    3. David Soberman, 2002. "Informative Advertising: An Alternate Viewpoint and Implications," Review of Marketing Science Working Papers 1-3-1009, Berkeley Electronic Press.
    4. L. Lambertini & R. Orsini, 2014. "Process Innovation and Product Quality Improvement in a Dynamic Monopoly," Working Papers wp926, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Fridriksson, Kari S. & Zoega, Gylfi, 2012. "Advertising as a predictor of investment," Economics Letters, Elsevier, vol. 116(1), pages 60-66.
    6. Richards, Timothy J. & Padilla, Luis, 2001. "Commodity R&D, Patenting, And Promotion," 2001 Annual meeting, August 5-8, Chicago, IL 20497, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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