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ADVERTISING, QUALITY AND SIGNALING

ADVERTISING, QUALITY AND SIGNALING ADVERTISING, QUALITY AND SIGNALING Jae-Cheol Kim Korea Advanced Institute of Science and Technology, Department of Management Science (Received December 14th, 1988; Final version February 2nd, 1989) I. INTRODUCTION In their interesting paper, Kihlstrom and Riordan (1984) develop a model of an advertising equilibrium in a market for an experience good whose quality is initially unknown to consumers unless it is actually consumed. They examine the role of advertising as an indirect source of information about quality - a signal of quality, putting aside the traditionally - emphasized functions such as direct, credible information provision, changing tastes, building-up of goodwill and so on ('). They show that under certain conditions, advertising can signal the true quality in that there exists a separating equilibrium where high-quality firms advertise while low-quality firms do not (2). In their analysis, and (*) The present paper deals with a signaling issue of advertising when consumers do not know cost condtions of a firm. It is shown that under certain conditions advertising signals quality of a newly-introduced product in a market. The price of the product turns out t o provide no useful information although it is positively related to quality. It is also shown http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Metroeconomica Wiley

ADVERTISING, QUALITY AND SIGNALING

Metroeconomica , Volume 40 (1) – Feb 1, 1989

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Publisher
Wiley
Copyright
Copyright © 1989 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0026-1386
eISSN
1467-999X
DOI
10.1111/j.1467-999X.1989.tb00440.x
Publisher site
See Article on Publisher Site

Abstract

ADVERTISING, QUALITY AND SIGNALING Jae-Cheol Kim Korea Advanced Institute of Science and Technology, Department of Management Science (Received December 14th, 1988; Final version February 2nd, 1989) I. INTRODUCTION In their interesting paper, Kihlstrom and Riordan (1984) develop a model of an advertising equilibrium in a market for an experience good whose quality is initially unknown to consumers unless it is actually consumed. They examine the role of advertising as an indirect source of information about quality - a signal of quality, putting aside the traditionally - emphasized functions such as direct, credible information provision, changing tastes, building-up of goodwill and so on ('). They show that under certain conditions, advertising can signal the true quality in that there exists a separating equilibrium where high-quality firms advertise while low-quality firms do not (2). In their analysis, and (*) The present paper deals with a signaling issue of advertising when consumers do not know cost condtions of a firm. It is shown that under certain conditions advertising signals quality of a newly-introduced product in a market. The price of the product turns out t o provide no useful information although it is positively related to quality. It is also shown

Journal

MetroeconomicaWiley

Published: Feb 1, 1989

References