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Price and Advertising Signals of Product Quality

Paul Milgrom and John Roberts
Journal of Political Economy
Vol. 94, No. 4 (Aug., 1986), pp. 796-821
Stable URL: http://www.jstor.org/stable/1833203
Page Count: 26
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Price and Advertising Signals of Product Quality
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Abstract

We present a signaling model, based on ideas of Phillip Nelson, in which both the introductory price and the level of directly "uninformative" advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good. Repeat purchases play a crucial role in our model. A second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals.

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