Modest Advertising Signals Strength
AbstractWe reexamine the role of prices and advertising expenditures as signals of quality. Consumers are either ``fastidious'' or ``indifferent.'' Fastidious individuals value high quality more and low quality less than do indifferent individuals. Then a sensible and robust separating equilibrium exists in which both types set their full-information prices. However, the high-quality firm cuts advertising below the full-information level of the low-quality firm, even if the full-information advertising expenditures of the high-quality firm are larger than those of the low-quality firm. Consumers respond favorably to advertising cuts and correctly identify quality. Hence, modest advertising may signal high quality.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 33 (2002)
Issue (Month): 2 (Summer)
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Other versions of this item:
- Ram Orzach & Per Baltzer Overgaard & Yair Tauman, 2001. "Modest Advertising Signals Strength," CIE Discussion Papers, University of Copenhagen. Department of Economics. Centre for Industrial Economics 2001-02, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
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- Boom, Anette, 2004.
""Download for Free": When do providers of digital goods offer free samples?,"
Discussion Papers, Free University Berlin, School of Business & Economics
2004/28, Free University Berlin, School of Business & Economics.
- Boom, Anette, 2004. ""Download for Free" - When Do Providers of Digital Goods Offer Free Samples?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 70, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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