Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26355
Authors: 
Linnemer, Laurent
Year of Publication: 
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

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