Quality uncertainty and informative advertising

José Luis Moraga-González*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We present a price signalling model with informative advertising. A costly advertisement informs of the good's quality directly and therefore the seller determines the fraction of informed buyers endogenously. We show that informative advertising only occurs in pooling equilibria. For an advertising pooling equilibrium to exist, consumer valuation for high-quality, advertising cost, prior probability that quality is high, and inaccuracy of the buyers' pre-purchase information must be sufficiently high. For some parameters there is a unique undefeated advertising pooling equilibrium. If advertising is used in equilibrium, the adverse selection problem is mitigated.

Original languageEnglish
Pages (from-to)615-640
Number of pages26
JournalInternational Journal of Industrial Organization
Volume18
Issue number4
Publication statusPublished - May 2000

Keywords

  • D42
  • D82
  • Informative advertising
  • L15
  • M37
  • Quality uncertainty
  • Signalling

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