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Advertising and price signaling of quality in a duopoly with endogenous locations


  • Bontems, P.
  • Meunier, V.


We analyze a two-sender quality-signaling game in a duopoly model where goods are horizontally and vertically differentiated. While locations are chosen under quality undertainty, firms choose prices and advertising expenditures being privately informed about their thpes. We show that pure price separation is impossible, and that dissipative advertising is necessary to ensure existence of separating equilibria. Equilibrium refinements discard all pooling equilibria and select a unique separating equilibrium. When vertical differentiation is not too high, horizontal differentiation is at a maximum, the high-quality firm advertises, and both firms adopt prices that are distorted upwards (compared to the symmetric-informati on benchmark). When vertical differentiation is high, firms choose identical locations and espost, only the high-quality firm obtains positive profits and signals its type through advertising only. Incomplete information and the subsequant signaling activity are chowh to increase the set of parameters values for which maximum horizontal differentiation occurs. ...French Abstract : Les auteurs étudient dans cet article, un modèle de concurrence au sein d'un duopole dans un contexte de différenciation horizontale. Les produits vendus par les firmes peuvent aussi potentiellement différer selon leur qualité. Les firmes choisissent tout d'abord leurs localisations de manière séquentielle puis simultanément leurs prix. A l'étape de localisation, la qualité du suiveur est connaissance commune tandis que la qualité du leader est incertaine mais révélée de manière privée avant l'étape de compétition par les prix. Ils montrent que la perspective de devoir signaler une qualité haute par le prix induit le leader à accroître au maximum la différenciation horizontale du produit. Ce résultat contraste fortement avec l'équilibre en information complète, qui peut impliquer une différenciation minimale ou intermédiaire selon les paramètres du modèle. Ainsi, le principe de différentiation maximale est restauré en présence d'information incomplète.

Suggested Citation

  • Bontems, P. & Meunier, V., 2006. "Advertising and price signaling of quality in a duopoly with endogenous locations," Economics Working Paper Archive (Toulouse) 200603, French Institute for Agronomy Research (INRA), Economics Laboratory in Toulouse (ESR Toulouse).
  • Handle: RePEc:rea:inrawp:200603

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    References listed on IDEAS

    1. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-1150, September.
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    Cited by:

    1. Roberto Fontana & Lionel Nesta, 2009. "Product Innovation and Survival in a High-Tech Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(4), pages 287-306, June.
    2. Levent Çelik, 2008. "Strategic Informative Advertising in a Horizontally Differentiated Duopoly," CERGE-EI Working Papers wp359, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    3. Ding, Yucheng, 2014. "Why Branded Firm may Benefit from Counterfeit Competition," MPRA Paper 52933, University Library of Munich, Germany.

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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