Modest Advertising Signals Strength
AbstractThis paper presents a signaling model where both price and advertising expenditures are used as signals of the initially unobservable quality of a newly introduced experience good. Consumers can be either "fastidious" or "indifferent". Fastidious individuals place a greater value on a high-quality product and a lesser value on the low-quality product than do indifferent individuals. It is shown that a sensible separating equilibrium exists where both firms set their full information prices. However, the high-quality firm cuts advertising expenditures 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 positively to advertising cuts and correctly identify the product quality. Hence, modest advertising may signal high quality.
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Bibliographic InfoPaper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2001-02.
Length: 30 pages
Date of creation: Apr 2001
Date of revision:
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product quality; informative advertising; signaling; signal reversal;
Other versions of this item:
- 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?,"
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 70, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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