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Advertising and Price Signaling of Quality in a Duopoly with Endogenous Locations

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Author Info

  • Philippe Bontems

    (Université des Sciences Sociales de Toulouse)

  • Valérie Meunier

    (University of Aarhus)

Abstract

We analyze a two-sender quality-signaling game in a duopoly model where goods are horizontally and vertically dierentiated. While locations are chosen under quality uncertainty, firms choose prices and advertising expenditures being privately informed about their types. We show that pure price separation is impossible, and that dissipative advertising is necessary to ensure existence of separating equilibria. Equilibrium refinements discard all pooling equilibria and select a unique separating equilibrium. When vertical differentiation is not too high, horizontal differentiation is maximum, the high-quality firm advertises, and both firms adopt prices that are distorted upwards (compared to the symmetric-information benchmark). When vertical differentiation is high, firms choose identical locations and ex post, only the high-quality firm obtains positive profits. Incomplete information and the subsequent signaling activity are shown to increase the set of parameters values for which maximum horizontal differentiation occurs.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2005-10.

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Length: 29 pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:kud:kuieci:2005-10

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Keywords: advertising; location choice; quality; incomplete information; multi-sender signaling game;

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  1. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-50, September.
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Cited by:
  1. Roberto Fontana & Lionel Nesta, 2007. "Product Innovation and Survival in a High-Tech Industry," KITeS Working Papers 208, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Dec 2007.
  2. Levent Çelik, 2008. "Strategic Informative Advertising in a Horizontally Differentiated Duopoly," CERGE-EI Working Papers wp359, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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