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Look How Little I’m Advertising!

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Author Info
Kyle Bagwell (Department of Economics, Columbia University)
Per Baltzer Overgaard (School of Economics and Management, University of Aarhus)

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Abstract

This paper studies the role of advertising and prices as signals of quality in a purely static setting, where repeat purchases are suppressed altogether, but where advertising affects demand directly. We first show, under standard regularity assumptions, that the high-quality firm will distort its price upwards and its level of advertising downwards compared to the complete-information case. We then show, under relatively mild additional conditions, that the high-quality firm will choose a level of advertising below that of the low-quality firm, even if the high-quality firm advertises most under complete information. Hence, empirically, a high price and a modest advertising budget may well signal high quality.

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File URL: http://www.econ.ku.dk/CIE/Discussion%20Papers/2005/2005-02.pdf
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Publisher Info
Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2005-02.

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Length: 33 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:kud:kuieci:2005-02

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Related research
Keywords: quality; signaling; pricing; advertising;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr. [Downloadable!] (restricted)
  2. Orzach, Ram & Overgaard, Per Baltzer & Tauman, Yair, 2002. "Modest Advertising Signals Strength," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 340-358, Summer.
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  3. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August. [Downloadable!] (restricted)
    Other versions:
  4. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug.. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Anette Boom, 2004. ""Download for Free" - When Do Providers of Digital Goods Offer Free Samples?," Discussion Papers 70, 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 of Munich. [Downloadable!]
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