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Dissipative Advertising Signals Quality Even Without Repeat Purchases

  • Laurent Linnemer

    (Crest)

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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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2008-18.

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Length: 20
Date of creation: 2008
Date of revision:
Handle: RePEc:crs:wpaper:2008-18
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  1. Simon P. Anderson & Régis Renault, 2002. "Advertising Content," Virginia Economics Online Papers 362, University of Virginia, Department of Economics.
  2. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  3. 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.
  4. Claude Fluet & Paolo G. Garella, 1999. "Advertising and Prices as Signals of Quality in a Regime of Price Rivalry," Cahiers de recherche du Département des sciences économiques, UQAM 9903, Université du Québec à Montréal, Département des sciences économiques.
  5. 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.
  6. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  7. 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.
  8. 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.
  9. Wilson, Robert, 1985. "Multi-dimensional signalling," Economics Letters, Elsevier, vol. 19(1), pages 17-21.
  10. Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June.
  11. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  12. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
  13. Quinzii, Martine & Rochet, Jean-Charles, 1985. "Multidimensional signalling," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 261-284, June.
  14. 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.
  15. 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 561-84, Fall.
  16. Engers, Maxim, 1987. "Signalling with Many Signals," Econometrica, Econometric Society, vol. 55(3), pages 663-74, May.
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