Modest Advertising Signals Strength

Ram Orzach, Per Overgaard () and Yair Tauman ()
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Ram Orzach: School of Industrial Engineering and Management, Ben-Gurion University of the Negeve

No 2001-02, CIE Discussion Papers from University of Copenhagen. Department of Economics. Centre for Industrial Economics

Abstract: This paper presents a signaling model where both price and advertising expenditures are used as signals of the initially unobservable quality of a newly introduced experience good. Consumers can be either "fastidious" or "indifferent". Fastidious individuals place a greater value on a high-quality product and a lesser value on the low-quality product than do indifferent individuals. It is shown that a sensible separating equilibrium exists where both firms set their full information prices. However, the high-quality firm cuts advertising expenditures below the full information level of the low-quality firm, even if the full information advertising expenditures of the high-quality firm are larger than those of the low-quality firm. Consumers respond positively to advertising cuts and correctly identify the product quality. Hence, modest advertising may signal high quality.

Keywords: product quality; informative advertising; signaling; signal reversal (search for similar items in EconPapers)
JEL-codes: C72 D82 L15 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2001-04
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Journal Article: Modest Advertising Signals Strength (2002)
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