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Modest Advertising Signals Strength


  • Ram Orzach

    (School of Industrial Engineering and Management, Ben-Gurion University of the Negeve)

  • Per Baltzer Overgaard

    (School of Economics and Management, University of Aarhus)

  • Yair Tauman

    (Center for Game Theory in Economics, SUNY)


This paper presents a signaling model where both price and advertising expenditures are used as signals of the initially unobservable quality of a newly introduced experience good. Consumers can be either "fastidious" or "indifferent". Fastidious individuals place a greater value on a high-quality product and a lesser value on the low-quality product than do indifferent individuals. It is shown that a sensible separating equilibrium exists where both firms set their full information prices. However, the high-quality firm cuts advertising expenditures 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 positively to advertising cuts and correctly identify the product quality. Hence, modest advertising may signal high quality.

Suggested Citation

  • Ram Orzach & Per Baltzer Overgaard & Yair Tauman, 2001. "Modest Advertising Signals Strength," CIE Discussion Papers 2001-02, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  • Handle: RePEc:kud:kuieci:2001-02

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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. repec:eee:ijrema:v:30:y:2013:i:3:p:211-218 is not listed on IDEAS
    3. 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.
    4. Aloisio Araujo & Daniel Gottlieb & Humberto Moreira, 2007. "A model of mixed signals with applications to countersignalling," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 1020-1043, December.

    More about this item


    product quality; informative advertising; signaling; signal reversal;

    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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