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Advertising, Consumer Information, and Product Quality

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  • Yehuda Kotowitz
  • Frank Mathewson

Abstract

This article analyzes a monopolist's quality and advertising policies and evaluates their social optimality. Our model considers a rational, though not fully informed, consumer who holds prior perceptions about aspects of quality, which determine his purchase pattern. These quality perceptions constitute the product's goodwill. Differences between expected and experienced quality lead to reevaluation of expectations. Monopolists affect these perceptions, and hence build up goodwill, by advertising and quality attribute variations. These affect consumer welfare directly and indirectly by their informational content. We find that advertising may profitably mislead, at least in the short run. Although the welfare effects of a monopolist's quality and advertising policies are not generally determinate, even when information is untrue, we are able to evaluate the welfare determinants of advertising policy from an objective standard and to specify some of the conditions under which advertising is socially excessive.

Suggested Citation

  • Yehuda Kotowitz & Frank Mathewson, 1979. "Advertising, Consumer Information, and Product Quality," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 566-588, Autumn.
  • Handle: RePEc:rje:bellje:v:10:y:1979:i:autumn:p:566-588
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    Citations

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    Cited by:

    1. Ursino, Giovanni & Piccolo, Salvatore & Tedeschi, Piero, 2012. "Deceptive advertising with rational buyers," MPRA Paper 42553, University Library of Munich, Germany.
    2. Eftichios Sartzetakis & Anastasios Xepapadeas & Emmanuel Petrakis, "undated". "The role of information provision as a policy instrument to supplement environmental taxes: Empowering consumers to choose optimally," DEOS Working Papers 1012, Athens University of Economics and Business.
    3. David A. Soberman, 2004. "Research Note: Additional Learning and Implications on the Role of Informative Advertising," Management Science, INFORMS, vol. 50(12), pages 1744-1750, December.
    4. Richards, Timothy J. & Padilla, Luis, 2001. "Commodity R&D, Patenting, And Promotion," 2001 Annual meeting, August 5-8, Chicago, IL 20497, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. David Soberman, 2002. "Informative Advertising: An Alternate Viewpoint and Implications," Review of Marketing Science Working Papers 1-3-1009, Berkeley Electronic Press.
    6. Luca Lambertini & Raimondello Orsini, 2015. "Quality Improvement and Process Innovation in Monopoly: A Dynamic Analysis," Working Paper series 15-12, Rimini Centre for Economic Analysis.
    7. Fridriksson, Kari S. & Zoega, Gylfi, 2012. "Advertising as a predictor of investment," Economics Letters, Elsevier, vol. 116(1), pages 60-66.
    8. repec:eee:labchp:v:2:y:1986:i:c:p:789-848 is not listed on IDEAS
    9. L. Lambertini & R. Orsini, 2014. "Process Innovation and Product Quality Improvement in a Dynamic Monopoly," Working Papers wp926, Dipartimento Scienze Economiche, Universita' di Bologna.
    10. repec:spr:joptap:v:170:y:2016:i:1:d:10.1007_s10957-015-0855-0 is not listed on IDEAS
    11. repec:spr:joptap:v:138:y:2008:i:1:d:10.1007_s10957-008-9368-4 is not listed on IDEAS
    12. L. Lambertini, 2001. "Dynamic Duopoly with Vertical Differentiation," Working Papers 396, Dipartimento Scienze Economiche, Universita' di Bologna.
    13. Goddard, E.W. & Tielu, A., 1987. "The OMMB'S Fluid Milk Advertising," Working Papers 244815, University of Guelph, Department of Food, Agricultural and Resource Economics.
    14. Laurent d'Ursel, 1983. "Politiques de « non-prix » : Equilibre et optimum," Revue Économique, Programme National Persée, vol. 34(6), pages 1057-1088.
    15. repec:spr:joptap:v:119:y:2003:i:2:d:10.1023_b:jota.0000005446.21301.d2 is not listed on IDEAS
    16. Caulkins, Jonathan P. & Feichtinger, Gustav & Grass, Dieter & Hartl, Richard F. & Kort, Peter M. & Seidl, Andrea, 2017. "Interaction of pricing, advertising and experience quality: A dynamic analysis," European Journal of Operational Research, Elsevier, vol. 256(3), pages 877-885.
    17. repec:spr:joptap:v:143:y:2009:i:3:d:10.1007_s10957-009-9575-7 is not listed on IDEAS

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