Advertising and Price Signaling of Quality in a Duopoly with Endogenous Locations
AbstractWe 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 InfoPaper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2005-10.
Length: 29 pages
Date of creation: Nov 2005
Date of revision:
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More information through EDIRC
advertising; location choice; quality; incomplete information; multi-sender signaling game;
Other versions of this item:
- Bontems, P. & Meunier, V., 2006. "Advertising and price signaling of quality in a duopoly with endogenous locations," Economics Working Paper Archive (Toulouse) 200603, French Institute for Agronomy Research (INRA), Economics Laboratory in Toulouse (ESR Toulouse).
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-19 (All new papers)
- NEP-COM-2005-11-19 (Industrial Competition)
- NEP-IND-2005-11-19 (Industrial Organization)
- NEP-MIC-2005-11-19 (Microeconomics)
- NEP-MKT-2005-11-19 (Marketing)
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