Does Competition Increase Advertising?

Tat-kei Lai and Travis Ng ()
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Travis Ng: The Chinese University of Hong Kong, Hong Kong

Working Papers from IESEG School of Management

Abstract: In Milgrom-Roberts (1986)’s model, introducing the possibility to die before customers’ repurchase alters the firm’s advertising incentive to signal hidden product quality. Two opposing forces result, one mechanical and the other strategic. Depending on their relative strengths, the equilibrium advertising can either rise or fall. To the extent that competition threatens firms’ survival, our result explains the mixed findings on the causal effects of competition on advertising. Introducing firm deaths in their model offers a new test of whether advertising signals quality, still an unsettled empirical question since Nelson (1974) first articulates advertising as a signal.

Keywords: Advertising; Signaling; Competition; Product Quality; Introductory pricing (search for similar items in EconPapers)
Pages: 42
Date: 2023-11
New Economics Papers: this item is included in nep-com and nep-mic
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Citations: View citations in EconPapers (1)

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