Look How Little I’m Advertising!
Kyle Bagwell and
Per Overgaard ()
No 2005-02, CIE Discussion Papers from University of Copenhagen. Department of Economics. Centre for Industrial Economics
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)
Pages: 33 pages
New Economics Papers: this item is included in nep-mic and nep-mkt
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuieci:2005-02
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