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Modest Advertising Signals Strength

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  • Orzach, Ram
  • Overgaard, Per Baltzer
  • Tauman, Yair

Abstract

We reexamine the role of prices and advertising expenditures as signals of quality. Consumers are either ``fastidious'' or ``indifferent.'' Fastidious individuals value high quality more and low quality less than do indifferent individuals. Then a sensible and robust separating equilibrium exists in which both types set their full-information prices. However, the high-quality firm cuts advertising below the full-information level of the low-quality firm, even if the full-information advertising expenditures of the high-quality firm are larger than those of the low-quality firm. Consumers respond favorably to advertising cuts and correctly identify quality. Hence, modest advertising may signal high quality.

Suggested Citation

  • Orzach, Ram & Overgaard, Per Baltzer & Tauman, Yair, 2002. "Modest Advertising Signals Strength," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 340-358, Summer.
  • Handle: RePEc:rje:randje:v:33:y:2002:i:summer:p:340-358
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    Cited by:

    1. 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.
    2. Anna Boisits & Roland Königsgruber, 2016. "Information acquisition and disclosure by firms in the presence of additional available information," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 24(1), pages 177-205, March.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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