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Advertising and prices as signals of quality in a regime of price rivalry

Author

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  • Fluet, Claude
  • Garella, Paolo G.

Abstract

Cet article réexamine le débat sur l'utilisation du prix et de la publicite comme signaux de qualité, et sur les effets concurrentiels de la publicité. Nous montrons que la publicité a un rôle de signal lorsqu'il y a rivalité en prix entre les entreprises, contrairement à ce que l'on obtient quand une entreprise est en situation de monopole. Plus précisement, dans une structure de marché oligopolistique, les prix sont des signaux adéquats de qualité lorsque les différences de qualité entre entreprises sont suffisamment grandes; si ces dernières sont faibles, les signaux sont des combinaisons prix-publicité. Du point de vue du bien-être, la publicité permet des prix plus bas, à la fois pour la qualité élevée et la qualité faible. Enfin, nous analysons aussi la publicité comme coût variable dissipatif, plutôt qu'uniquement comme coût fixe. This paper reexamines the debate as to whether firms use price or advertising to signal quality and whether advertising has pro- or anti-competitive effects. We show that the signaling theory strongly predicts that advertising signals quality if price rivalry prevails, in contrast to single-firm models. Under price rivalry, price signaling prevails for sufficient inter-brand quality differences; combined price-advertising signals must be used when this difference shrinks. From a welfare point of view, advertising leads to lower prices for both the high and low qualities. Finally, we analyze advertising signals in the form of variable rather than fixed dissipative costs.
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Suggested Citation

  • Fluet, Claude & Garella, Paolo G., 2002. "Advertising and prices as signals of quality in a regime of price rivalry," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 907-930, September.
  • Handle: RePEc:eee:indorg:v:20:y:2002:i:7:p:907-930
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    References listed on IDEAS

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    1. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-450, June.
    2. Benham, Lee, 1972. "The Effect of Advertising on the Price of Eyeglasses," Journal of Law and Economics, University of Chicago Press, vol. 15(2), pages 337-352, October.
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    8. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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