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Dissipative Advertising Signals Quality Even Without Repeat Purchases

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  • Laurent Linnemer

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Abstract

Economists have emphasized the role of dissipative advertising and price as signals of quality. Most works, however, limit the number of types to two options: high and low quality. Yet, production costs and quality both result from R&D efforts and therefore are both uncertain. I characterize the optimal separating marketing mix (price and advertising) when quality and marginal cost are both subject to chance. In a static framework (no repeat purchases and no informed consumers), advertising appears to be necessary together with price to signal quality. Equilibrium profits depend on cost but not on quality: all rents are dissipated for signaling purpose.
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Suggested Citation

  • Laurent Linnemer, 2008. "Dissipative Advertising Signals Quality Even Without Repeat Purchases," Working Papers 2008-18, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2008-18
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    References listed on IDEAS

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    1. Linnemer, Laurent, 2002. "Price and advertising as signals of quality when some consumers are informed," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 931-947, September.
    2. Simon P. Anderson & Régis Renault, 2002. "Advertising Content," Virginia Economics Online Papers 362, University of Virginia, Department of Economics.
    3. 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.
    4. 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, pages 907-930.
    5. 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.
    6. Daughety, Andrew F. & Reinganum, Jennifer F., 2007. "Competition and confidentiality: Signaling quality in a duopoly when there is universal private information," Games and Economic Behavior, Elsevier, vol. 58(1), pages 94-120, January.
    7. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    8. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, pages 796-821.
    9. Engers, Maxim, 1987. "Signalling with Many Signals," Econometrica, Econometric Society, vol. 55(3), pages 663-674, May.
    10. Thomas, Louis & Shane, Scott & Weigelt, Keith, 1998. "An empirical examination of advertising as a signal of product quality," Journal of Economic Behavior & Organization, Elsevier, vol. 37(4), pages 415-430, December.
    11. Simon P. Anderson & Régis Renault, 2006. "Advertising Content," American Economic Review, American Economic Association, vol. 96(1), pages 93-113, March.
    12. Horstmann, Ignatius J & MacDonald, Glenn M, 1994. "When Is Advertising a Signal of Product Quality?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(3), pages 561-584, Fall.
    13. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    14. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
    15. Laurent Linnemer, 2002. "Price and advertising as signals of quality when some consumers are informed," Post-Print hal-01629769, HAL.
    16. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
    17. Wilson, Robert, 1985. "Multi-dimensional signalling," Economics Letters, Elsevier, vol. 19(1), pages 17-21.
    18. Quinzii, Martine & Rochet, Jean-Charles, 1985. "Multidimensional signalling," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 261-284, June.
    19. Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, Elsevier.
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    Cited by:

    1. Haiyan Liu, 2016. "A Structural Model of Advertising Signaling and Social Learning: The Case of the Motion Picture Industry," Working Papers 0216, University of South Florida, Department of Economics.

    More about this item

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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