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Look How Little I’m Advertising!

Author

Listed:
  • Kyle Bagwell

    (Department of Economics, Columbia University)

  • Per Baltzer Overgaard

    (School of Economics and Management, University of Aarhus)

Abstract

This paper studies the role of advertising and prices as signals of quality in a purely static setting, where repeat purchases are suppressed altogether, but where advertising affects demand directly. We first show, under standard regularity assumptions, that the high-quality firm will distort its price upwards and its level of advertising downwards compared to the complete-information case. We then show, under relatively mild additional conditions, that the high-quality firm will choose a level of advertising below that of the low-quality firm, even if the high-quality firm advertises most under complete information. Hence, empirically, a high price and a modest advertising budget may well signal high quality.

Suggested Citation

  • Kyle Bagwell & Per Baltzer Overgaard, 2005. "Look How Little I’m Advertising!," CIE Discussion Papers 2005-02, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  • Handle: RePEc:kud:kuieci:2005-02
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    File URL: http://www.econ.ku.dk/cie/dp/dp_2003-2006/2005-02.pdf/
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    Cited by:

    1. Eduardo Perez-Richet, 2012. "Competing with Equivocal Information," Working Papers hal-00675126, HAL.
    2. 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.
    3. Harbaugh, Richmond & To, Theodore, 2020. "False modesty: When disclosing good news looks bad," Journal of Mathematical Economics, Elsevier, vol. 87(C), pages 43-55.

    More about this item

    Keywords

    quality; signaling; pricing; advertising;

    JEL classification:

    • 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
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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