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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

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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Bibliographic 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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Cited by:
  1. Thomas D. Jeitschko & Hans-Theo Normann, 2009. "Signaling in Deterministic and Stochastic Settings," Royal Holloway, University of London: Discussion Papers in Economics 09/12, Department of Economics, Royal Holloway University of London.
  2. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Secrecy and Safety," Vanderbilt University Department of Economics Working Papers 0317, Vanderbilt University Department of Economics, revised Sep 2003.
  3. Silvia Martínez-Gorricho, 2012. "Beneficial consumer fraud," Working Papers. Serie AD 2012-13, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  4. Ruiz-Aliseda, Francisco, 2009. "Misinformative advertising," IESE Research Papers D/809, IESE Business School.
  5. Nick Feltovich & Rick Harbaugh & Ted To, . "Signaling and Countersignaling: A Theory of Understatement," Claremont Colleges Working Papers 1999-21, Claremont Colleges.
  6. TRUYTS, Tom, 2012. "Stochastic signaling: information substitutes and complements," CORE Discussion Papers 2012022, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Dragan Filipovich, 2001. "Price dynamics in a two-period reputation model," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 16(2), pages 185-201.
  8. Ian McCarthy, 2008. "Simulating Sequential Search Models with Genetic Algorithms: Analysis of Price Ceilings, Taxes, Advertising and Welfare," Caepr Working Papers 2008-010, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

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