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Dissipative Advertising Signals Quality Even Without Repeat Purchases

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  • Laurent Linnemer

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Abstract

Economists have emphasized the role of dissipative advertising and price as signals of quality. Most works, however, limit the number of types to two options: high and low quality. Yet, production costs and quality both result from R&D efforts and therefore are both uncertain. I characterize the optimal separating marketing mix (price and advertising) when quality and marginal cost are both subject to chance. In a static framework (no repeat purchases and no informed consumers), advertising appears to be necessary together with price to signal quality. Equilibrium profits depend on cost but not on quality: all rents are dissipated for signaling purpose.
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Suggested Citation

  • Laurent Linnemer, 2008. "Dissipative Advertising Signals Quality Even Without Repeat Purchases," Working Papers 2008-18, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2008-18
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    References listed on IDEAS

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    1. Linnemer, Laurent, 2002. "Price and advertising as signals of quality when some consumers are informed," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 931-947, September.
    2. Fluet, Claude & Garella, Paolo G., 2002. "Advertising and prices as signals of quality in a regime of price rivalry," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 907-930, September.
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    Cited by:

    1. Haiyan Liu, 2016. "A Structural Model of Advertising Signaling and Social Learning: The Case of the Motion Picture Industry," Working Papers 0216, University of South Florida, Department of Economics.

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    More about this item

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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