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Title:Dissipative advertising signals quality even without repeat purchases PDF Logo
Authors:Linnemer, Laurent
Issue Date:2008
Series/Report no.:CESifo working paper 2310
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.
Subjects:quality
signaling
dissipative advertising
JEL:L12
L15
M37
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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