Modest advertising signals strength

Ram Orzach*, Per Baltzer Overgaard, Yair Tauman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


We reexamine the role of prices and advertising expenditures as signals of quality. Consumers are either "fastidious" or "indifferent." Fastidious individuals value high quality more and low quality less than do indifferent individuals. Then a sensible and robust separating equilibrium exists in which both types set their full-information prices. However, the high-quality firm cuts advertising below the full-information level of the low-quality firm, even if the full-information advertising expenditures of the high-quality firm are larger than those of the low-quality firm. Consumers respond favorably to advertising cuts and correctly identify quality. Hence, modest advertising may signal high quality.

Original languageEnglish
Pages (from-to)340-358
Number of pages19
JournalRAND Journal of Economics
Issue number2
StatePublished - 2002
Externally publishedYes


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