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Advertising as Information: Matching Products to Buyers

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  • Kyle Bagwell
  • Garey Ramey

Abstract

We consider communication of quality via cheap talk and dissipative advertising, when consumers have heterogeneous tastes for quality. For search goods, cheap talk communicates quality when fixed costs are roughly constant across quality levels, while if fixed costs vary greatly with quality, then firms having the higher-fixed-cost quality level use dissipative advertising. Further, product differentiation (generically) cannot occur in the absence of advertising. For experience goods, quality can be communicated by cheap talk in a range where low-quality firms have greater fixed costs, and low-quality firms use dissipative advertising if their fixed costs are greater still.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1005.

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Date of creation: Sep 1992
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Handle: RePEc:nwu:cmsems:1005

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Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
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Web page: http://www.kellogg.northwestern.edu/research/math/
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  1. Bagwell, Kyle & Ramey, Garey, 1994. "Advertising and Coordination," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 153-72, January.
  2. Schmalensee, Richard, 1978. "A Model of Advertising and Product Quality," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 485-503, June.
  3. repec:fth:stanho:91-5 is not listed on IDEAS
  4. Archibald, Robert B & Haulman, Clyde A & Moody, Carlisle E, Jr, 1983. " Quality, Price, Advertising, and Published Quality Ratings," Journal of Consumer Research, University of Chicago Press, vol. 9(4), pages 347-56, March.
  5. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  6. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June.
  7. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June.
  8. 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.
  9. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  10. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  11. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
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Cited by:
  1. Archishman Chakraborty & Rick Harbaugh, 2012. "Persuasive Puffery," Working Papers 2012-05, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  2. Jean-Christophe Bureau & Estelle Gozlan & Stéphan Marette, 2001. "Quality Signaling and International Trade in Food Products," Food and Agricultural Policy Research Institute (FAPRI) Publications 01-wp283, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.

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