Quality uncertainty and informative advertising

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.