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Advertising, quality, and willingness-to-pay: Experimental examination of signaling theory

  • Tsui, Hsiao-Chien
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    According to the quality signaling theory, firms are motivated to invest more advertising in high-quality products. This paper conducts an experiment through a closed-ended double-bounded dichotomous choice of the contingent valuation method to measure consumer willingness-to-pay for a fictitious cell phone market of varying quality before and after advertising. The results show that advertising effectively influences consumer awareness of perceived quality and enhance their WTP. The results also suggest that even though the high- and low-quality products differ in the investment of advertising, the effect of advertising on the increase in consumer WTP for low-quality products as well as for high-quality products.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167487012000979
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    Article provided by Elsevier in its journal Journal of Economic Psychology.

    Volume (Year): 33 (2012)
    Issue (Month): 6 ()
    Pages: 1193-1203

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    Handle: RePEc:eee:joepsy:v:33:y:2012:i:6:p:1193-1203
    Contact details of provider: Web page: http://www.elsevier.com/locate/joep

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    1. Hao Zhao, 2000. "Raising Awareness and Signaling Quality to Uninformed Consumers: A Price-Advertising Model," Marketing Science, INFORMS, vol. 19(4), pages 390-396, January.
    2. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 647-58, October.
    3. Kirmani, Amna, 1990. " The Effect of Perceived Advertising Costs on Brand Perceptions," Journal of Consumer Research, University of Chicago Press, vol. 17(2), pages 160-71, September.
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    5. 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.
    6. Cameron, Trudy Ann & James, Michelle D, 1987. "Efficient Estimation Methods for "Closed-ended' Contingent Valuation Surveys," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 269-76, May.
    7. Kanninen Barbara J., 1995. "Bias in Discrete Response Contingent Valuation," Journal of Environmental Economics and Management, Elsevier, vol. 28(1), pages 114-125, January.
    8. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
    9. 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.
    10. Hoehn, John P. & Randall, Alan, 1987. "A satisfactory benefit cost indicator from contingent valuation," Journal of Environmental Economics and Management, Elsevier, vol. 14(3), pages 226-247, September.
    11. Dittmar, Helga & Beattie, Jane & Friese, Susanne, 1995. "Gender identity and material symbols: Objects and decision considerations in impulse purchases," Journal of Economic Psychology, Elsevier, vol. 16(3), pages 491-511, September.
    12. Azar, Ofer H., 2011. "Do people think about absolute or relative price differences when choosing between substitute goods?," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 450-457, June.
    13. Anna Alberini, 1995. "Testing Willingness-to-Pay Models of Discrete Choice Contingent Valuation Survey Data," Land Economics, University of Wisconsin Press, vol. 71(1), pages 83-95.
    14. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
    15. Berrens, Robert P. & Bohara, Alok K. & Jenkins-Smith, Hank C. & Silva, Carol L. & Weimer, David L., 2004. "Information and effort in contingent valuation surveys: application to global climate change using national internet samples," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 331-363, March.
    16. Cameron, Trudy Ann, 1988. "A new paradigm for valuing non-market goods using referendum data: Maximum likelihood estimation by censored logistic regression," Journal of Environmental Economics and Management, Elsevier, vol. 15(3), pages 355-379, September.
    17. Kirmani, Amna & Wright, Peter, 1989. " Money Talks: Perceived Advertising Expense and Expected Product Quality," Journal of Consumer Research, University of Chicago Press, vol. 16(3), pages 344-53, December.
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