Dissipative Advertising Signals Quality even without Repeat Purchases
AbstractEconomists have emphasized the role of dissipative advertising and price as signals of quality. Most works, however, limit the number of types to two options: high and low quality. Yet, production costs and quality both result from R&D efforts and therefore are both uncertain. I characterize the optimal separating marketing mix (price and advertising) when quality and marginal cost are both subject to chance. In a static framework (no repeat purchases and no informed consumers), advertising appears to be necessary together with price to signal quality. Equilibrium profits depend on cost but not on quality: all rents are dissipated for signaling purpose.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2310.
Date of creation: 2008
Date of revision:
quality; signaling; dissipative advertising;
Other versions of this item:
- Laurent Linnemer, 2008. "Dissipative Advertising Signals Quality Even Without Repeat Purchases," Working Papers 2008-18, Centre de Recherche en Economie et Statistique.
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- M37 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Advertising
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