"Price and advertising as signals of quality when some consumers are informed,"
International Journal of Industrial Organization Volume 20, Issue 7, September 2002, pages 931-47.
JEL codes: D82, L12, L15, M37
Keywords: quality, durable good, signaling, advertising
Abstract: A monopoly produces a good of either high or low quality. Some consumers are informed about quality while others are uninformed and infer quality through the firm's marketing strategy. The model is an extension of Bagwell and Riordan (1991). Dissipative advertising (combined with a high price) is an efficient signal of quality when the marginal cost of production of high quality is low. If the proportion of informed customers is low, quality is signaled only through a high price. However, if this proportion is intermediate, quality is signaled by both advertising and price.