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Quality uncertainty and informative advertising

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  • Moraga-Gonzalez, Jose Luis

Abstract

We consider a single period model where a monopolist introduces a product of uncertain quality. Before pricing and informative advertising decisions take place, the producer observes the true quality of the good while consumers receive an independent signal which is correlated with the true quality of the product. We show that if advertising occurs in equilibrium, there must exist some pooling. We then characterize the constellations of parameters for which advertising occurs in equilibrium: For an advertising full pooling equilibrium to exist, (a) the consumers' valuation for the high quality must be high enough, (b) the informativeness of the market signal must be sufficiently low, (c) the costs of advertising must be high enough and (d) the consumers' priori probability of high quality must be sufficiently high. Existence of an advertising semi-separating equilibrium also requires the three first conditions but, in contrast, the consumers' a priori probability of high quality cannot be too large. When advertising occurs in equilibrium, the adverse selection problem is mitigated. Moreover, the lower are advertising costs, the more intense is the alleviation of that problem.
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  • Moraga-Gonzalez, Jose Luis, 2000. "Quality uncertainty and informative advertising," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 615-640, May.
  • Handle: RePEc:eee:indorg:v:18:y:2000:i:4:p:615-640
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    Cited by:

    1. Tsuchihashi, Toshihiro, 2008. "Market research and complementary advertising under asymmetric information," Discussion Papers 2008-05, Graduate School of Economics, Hitotsubashi University.
    2. Boom, Anette, 2004. ""Download for Free": When do providers of digital goods offer free samples?," Discussion Papers 2004/28, Free University Berlin, School of Business & Economics.
    3. Levent Çelik, 2008. "Monopoly Provision of Tune-ins," CERGE-EI Working Papers wp362, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    4. Aldo Pignataro, 2019. "The effects of loss aversion on deceptive advertising policies," Theory and Decision, Springer, vol. 87(4), pages 451-472, November.
    5. Grunewald, Andreas & Kräkel, Matthias, 2017. "Advertising as signal jamming," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 91-113.
    6. Young-Han Kim & Praveen Aggarwal & Young-Myung Ha & Tai Hoon Cha, 2006. "Optimal pricing strategy for foreign market entry: a game theoretic approach," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(8), pages 643-653.
    7. Levent Çelik, 2008. "Viewer Sampling and Quality Signaling in a Television Market," CERGE-EI Working Papers wp363, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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