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Price Advertising and the Deterioration of Product Quality

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  • William P. Rogerson

Abstract

Arguments in favour of self-enforced bans on advertising by professionals often rely on the stylized fact that advertising can communicate information about price but not about quality. This being the case, it is argued that allowing professionals to advertise runs the risk that firms will compete vigorously over price at the expense of the quality of their product. This paper shows that even if price can communicate no information directly about quality, it can do so indirectly because price will be a signal of quality. Because of this, allowing advertising is shown to improve consumer welfare.

Suggested Citation

  • William P. Rogerson, 1988. "Price Advertising and the Deterioration of Product Quality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(2), pages 215-229.
    • Handle: RePEc:oup:restud:v:55:y:1988:i:2:p:215-229.
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    File URL: http://hdl.handle.net/10.2307/2297578
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    Cited by:

    1. Delacroix, Alain & Shi, Shouyong, 2013. "Pricing and signaling with frictions," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1301-1332.
    2. Erik Gronqvist & Douglas Lundin, 2009. "Incentives for clinical trials," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 18(5), pages 513-531.
    3. Frank H. Stephen, 2013. "Lawyers, Markets and Regulation," Books, Edward Elgar Publishing, number 14803.
    4. Camille Chaserant & Sophie Harnay, 2010. "Déréglementer la profession d’avocat ? Les apories de l’analyse économique," Working Papers hal-04140922, HAL.
    5. Bester, H., 1991. "Bargaining V.S. Price Competition in a Market with Quality Uncertainty," Papers 9113, Tilburg - Center for Economic Research.
    6. Gerhard Orosel & Klaus G. Zauner, 2004. "Vertical Product Differentiation When Quality is Unobservable to Buyers," CESifo Working Paper Series 1271, CESifo.
    7. Kyle Bagwell & Garey Ramey, 1988. "Advertising, Coordination, and Signaling," Discussion Papers 787, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. Itai Ater & Eugene Orlov, 2013. "The Effect of the Internet on Performance and Quality: Evidence from the Airline Industry," Working Papers 13-07, NET Institute.
    9. Anna Nagurney & Dong Li, 2015. "A supply chain network game theory model with product differentiation, outsourcing of production and distribution, and quality and price competition," Annals of Operations Research, Springer, vol. 226(1), pages 479-503, March.
    10. Li, Jianpei & Zhang, Wanzhu, 2022. "Behavior-based pricing and signaling of product quality," MPRA Paper 120263, University Library of Munich, Germany, revised 03 Jan 2023.
    11. Moraga-González, José-Luis & Sun, Yajie, 2022. "Product Quality and Consumer Search," CEPR Discussion Papers 14669, C.E.P.R. Discussion Papers.
    12. Praveen K. Kopalle & João L. Assunção, 2000. "When (not) to indulge in 'puffery': the role of consumer expectations and brand goodwill in determining advertised and actual product quality," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 21(6), pages 223-241.
    13. Chen, Yong & Mak, Barry & Li, Zhou, 2013. "Quality deterioration in package tours: The interplay of asymmetric information and reputation," Tourism Management, Elsevier, vol. 38(C), pages 43-54.
    14. Dubovik, Andrei & Janssen, Maarten C.W., 2012. "Oligopolistic competition in price and quality," Games and Economic Behavior, Elsevier, vol. 75(1), pages 120-138.
    15. Kopalle, Praveen K. & Lehmann, Donald R., 2015. "The Truth Hurts: How Customers May Lose From Honest Advertising," International Journal of Research in Marketing, Elsevier, vol. 32(3), pages 251-262.
    16. Fulan Wu, 2017. "Signaling Unobservable Quality Choice through Price and Advertising: The Case with Competing Firms," Manchester School, University of Manchester, vol. 85(2), pages 243-260, March.
    17. Camille Chaserant & Sophie Harnay, 2013. "The regulation of quality in the market for legal services: Taking the heterogeneity of legal services seriously," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 10(2), pages 267-291, August.
    18. Gerhard O. Orosel & Klaus G. Zauner, 2011. "Quality Diversity and Prices in Markets for Experience Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 709-738, September.
    19. François Eymard-Duvernay, 1989. "Conventions de qualité et formes de coordination," Revue Économique, Programme National Persée, vol. 40(2), pages 329-360.
    20. Praveen K. Kopalle & Donald R. Lehmann, 2006. "Setting Quality Expectations When Entering a Market: What Should the Promise Be?," Marketing Science, INFORMS, vol. 25(1), pages 8-24, 01-02.
    21. Anna Nagurney & Dong Li, 2014. "A Dynamic Network Oligopoly Model with Transportation Costs, Product Differentiation, and Quality Competition," Computational Economics, Springer;Society for Computational Economics, vol. 44(2), pages 201-229, August.

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