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Quality uncetainty and informative advertising

José Luis Moraga González
Authors registered in the RePEc Author Service: Jose Luis Moraga-Gonzalez ()

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: We consider a single period model where a monopolist introduces a product of uncertain quality. Before pricing and informative advertising decisions take place, the producer observes the true quality of the good while consumers receive an independent signal which is correlated with the true quality of the product. We show that if advertising occurs in equilibrium, there must exist some pooling. We then characterize the constellations of parameters for which advertising occurs in equilibrium: For an advertising full pooling equilibrium to exist, (a) the consumers' valuation for the high quality must be high enough, (b) the informativeness of the market signal must be sufficiently low, (c) the costs of advertising must be high enough and (d) the consumers' priori probability of high quality must be sufficiently high. Existence of an advertising semi-separating equilibrium also requires the three first conditions but, in contrast, the consumers' a priori probability of high quality cannot be too large. When advertising occurs in equilibrium, the adverse selection problem is mitigated. Moreover, the lower are advertising costs, the more intense is the alleviation of that problem.

Keywords: Informative; Advertising; Quality; uncertainty; signaling (search for similar items in EconPapers)
Date: 1997-06
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Journal Article: Quality uncertainty and informative advertising (2000) Downloads
Working Paper: Quality Uncertainty and Informative Advertising (1997)
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