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Upstream Pricing and Advertising Signal Downstream Demand

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  • Albaek, Svend
  • Overgaard, Per Baltzer

Abstract

This paper considers price and advertising decisions by a monopolist manufacturer who is privately informed about the strength of consumer demand. Consumers respond to advertising and to the retail price chosen by an uninformed retailer on the basis of his beliefs about demand. This signaling game has a unique intuitive equilibrium outcome in which a high-demand manufacturer chooses his full-information pair of wholesale price and advertising. When demand is low, the wholesale price is distorted downward from its full information level, whereas demand-enhancing advertising may be distorted in either direction. Dissipative advertising is not distorted because it is never used. Copyright 1992 by MIT Press.

Suggested Citation

  • Albaek, Svend & Overgaard, Per Baltzer, 1992. "Upstream Pricing and Advertising Signal Downstream Demand," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(4), pages 677-698, Winter.
  • Handle: RePEc:bla:jemstr:v:1:y:1992:i:4:p:677-98
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    References listed on IDEAS

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    1. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-459, March.
    2. Kyle Bagwell & Garey Ramey, 1988. "Advertising and Limit Pricing," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 59-71, Spring.
    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.
    4. Bagwell, Kyle & Ramey, Garey, 1990. "Advertising and pricing to deter or accommodate entry when demand is unknown," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 93-113.
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    Cited by:

    1. Yutian Chen & Wei Tan, 2012. "A Theory on Predatory Advertising After a Demand-Reducing Shock," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 38(4), pages 460-478.
    2. Kyle Bagwell, 2007. "Signalling and entry deterrence: a multidimensional analysis," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 670-697, September.
    3. Albaek, Svend & Overgaard, Per Baltzer, 1998. "Receiver discretion in signalling models: Information transmission to competing retailers," International Journal of Industrial Organization, Elsevier, vol. 16(2), pages 209-228, March.
    4. Alex Barrachina & Yair Tauman & Amparo Urbano Salvador, 2014. "Entry with Two Correlated Signals," Discussion Papers in Economic Behaviour 0714, University of Valencia, ERI-CES.

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