Advertising as a Signal of Quality, A New Explanation
The present article provides a unied explanation for several phenomena related to advertising by firms. (i) Advertising without repeat purchase of the product, (ii) advertising from established brands, or post-introductory, (iii) simultaneous advertising from low and high quality firms, (iv) its persistence and pro-cyclicality. The explanation is original because it rests upon oligopolistic interaction. The analysis hinges upon two fundamental results. The first is that advertising allows separation when a signal via prices only does not. The second is that purely dissipative advertising can be used to strategically deter entry. Hence, a link is established between entry deterrence and signaling.
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- 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.
- Kyle Bagwell & Garey Ramey, 1988.
"Advertising and Limit Pricing,"
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- Kyle Bagwell & Garey Ramey, 1987. "Advertising and Limit Pricing," Discussion Papers 729, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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- Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
- Steven A Matthews & Doron Fertig, 1990. "Advertising Signals of Product Quality," Discussion Papers 881, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
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