IDEAS home Printed from https://ideas.repec.org/p/kud/kuieci/2001-02.html
   My bibliography  Save this paper

Modest Advertising Signals Strength

Author

Listed:
  • 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)

Abstract

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
    as

    Download full text from publisher

    File URL: http://www.econ.ku.dk/cie/dp/dp_2000-2002/2001-02.pdf/
    Download Restriction: no

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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

    Keywords

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kud:kuieci:2001-02. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Hoffmann). General contact details of provider: http://edirc.repec.org/data/ciekudk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.