Look How Little I’m Advertising!

Kyle Bagwell and Per Baltzer Overgaard ()

No 2005-02, CIE Discussion Papers from University of Copenhagen. Department of Economics. Centre for Industrial Economics

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.

Keywords: quality; signaling; pricing; advertising (search for similar items in EconPapers)
JEL-codes: D82 L15 M37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-mkt
Date: 2005-09
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