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I'm Not a High-Quality Firm -- But I Play One on TV

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Author Info
Mark N. Hertzendorf

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Abstract

This article investigates the role of noise in a multidimensional signalling game. A monopolist that offers a high- or low-quality product can signal its quality to consumers through its selection of price and advertising. It is shown that when the advertising channel is noisy there is no separating equilibrium where the monopolist will simultaneously employ both signalling mechanisms. Advertising will take place only when price is uncorrelated to quality. Furthermore, the noise complicates the process of consumer inference. This enables a low-quality firm to take advantage of consumer ignorance by partially mimicking the strategy of the high-quality firm.

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

Volume (Year): 24 (1993)
Issue (Month): 2 (Summer)
Pages: 236-247
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Handle: RePEc:rje:randje:v:24:y:1993:i:summer:p:236-247

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  1. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Secrecy and Safety," Working Papers 0317, Department of Economics, Vanderbilt University, revised Sep 2003. [Downloadable!]
    Other versions:
  2. C. Robert Clark & Ignatius J. Horstmann, 2004. "Advertising and Coordination in Markets with Consumption Scale Effects," CIRANO Working Papers 2004s-35, CIRANO. [Downloadable!]
    Other versions:
  3. Andrew F. Daughety & Jennifer F. Reinganum, 2004. "Competition and Confidentiality: Signaling Quality in a Duopoly when there is Universal Private Information," Working Papers 0417, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
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