Advertising as Noisy Information about Product Quality

Size: px
Start display at page:

Download "Advertising as Noisy Information about Product Quality"

Transcription

1 Advertising as Noisy Information about Product Quality Hendrik Hakenes Leibniz University of Hannover Martin Peitz University of Mannheim June 6, 2010 preliminary and incomplete Abstract A firm has to make consumers aware of a new product introduction. It also has to convince them that the product is of high quality. In this paper, we consider the interplay between directly and indirectly informative advertising in a monopoly model with repeat purchase. When consumers observe the advertising expenditure, the firm may excessively advertise high quality. However, when consumers only learn from seeing the product advertised, a high-quality firm cannot perfectly distinguish itself from low quality and advertises less than absent quality uncertainty. Keywords: Informative advertising, advertising signal, product quality Department of Economics, Königsworther Platz 1, Hannover, Germany, hakenes@fmt.uni-hannover.de. Also affiliated with Max Planck Institute, Bonn. Department of Economics, University of Mannheim, Mannheim, Germany, Martin.Peitz@googl .com. Also affiliated with CEPR, CESifo, ENCORE, and ZEW.

2 1 Introduction A firm introducing an experience goods faces two hurdles it has to overcome: It has to make consumers aware of the product, and it has to convince consumers that the product is likely to be of high quality. Both hurdles can possibly be overcome, the first by informing consumers that a new product is available, the second by using advertising to convince consumers of high product quality. As we analyze in this paper, the equilibrium advertising strategy depends on whether the advertising expenditure is public or private information of the firm. One of the celebrated results in industrial organization is that consumers can infer the quality of a product from the amount of advertising that is spent (see Nelson, 1970, 1974, Milgrom and Roberts, 1986, and the survey by Bagwell, 2005). Here, advertising is equivalent to public money burning. Arguably, advertising in the super bowl constitutes such public money burning because viewers know that such advertising is very expensive. While consumers may have some imprecise knowledge of the advertising expenditure in the typical advertising campaign, we consider the perfect observability assumption to be in many cases a bad approximation of reality and may rather postulate the opposite: Consumers may be exposed to advertising, but they do not know the total advertising expenditure. This applies in particular to advertising campaigns that involve a number of competing media (e.g., different newspapers or different channels). What happens if consumers cannot observe the amount of advertising but only realize that a particular product was advertised to them? We present a simple stylized model to answer this question: Receiving the ad provides noisy information about product quality. We show this result in a simple repeatpurchase monopoly model in which a larger advertising expenditure increases the probability that a consumer is exposed to an ad. The assumption that consumers are homogeneous, allows us to abstract from price signaling issues. Due to the repeat-purchase effect, a consumer who becomes informed about the existence of a product is more valuable to a high-quality than a lowquality producer. Consequently, a high-quality producer spends more on advertising than a low quality producer. However, since informing the first consumer is assumed to be costless, the low-quality producer will necessarily 1

3 spend a strictly positive amount on advertising and is able to free-ride on the advertising effort of the high-quality firm. Hence, a high-quality firm cannot fully separate from a low-quality firm. Consumers are Bayesian rational. They use the fact that a high-quality firm advertises more than a low-quality firm to update their belief about the quality of the firm from which they have seen the ad. Hence, directly informative advertising also contains some noisy information about unobservable product quality. Our theory predicts a positive but not perfect correlation between product quality and advertising expenditure. To our knowledge, the idea that informative advertising about the existence of a product provides noisy information about product quality has not been previously studied. As a starting point of our analysis, we observe that advertising serves two functions, a directly informative (about a product s existence) and an indirectly informative (about a product s quality). Previous work on indirectly informative advertising, starting with Nelson (1970,1974), Kihlstrom and Riordan (1984), and Milgrom and Roberts (1986), postulated that consumers observe the advertising expenditure. Hertzendorf (1993) considers noisy advertising in a signaling model in which all consumers are aware of the product. From the point of view of the consumer, advertising is stochastic, because the consumer observes only a (random) fraction of the advertising. In his setting with downward sloping demand, the firm may use price and advertising signals. He shows that a low-quality firm partly mimics a high-quality firm. In equilibrium, high and low-quality firms post ads, while the price is independent of quality. Previous work on directly informative advertising focused on search good (see, in particular, Grossman and Shapiro, 1984, who analyze competitive effects of informative advertising). An exception is Moraga (2000), who analyzes informative advertising in a single-period monopoly market in which consumers are initially uncertain about product quality but receive a noisy signal about quality. However, his setting is markedly different from ours: Consumers who become exposed to advertising become perfectly informed about product quality (i.e., advertising provides truthful information on product characteristics, as in Anderson and Renault, 2006). Thus, a lowquality firm does not have an incentive to advertise. Probably closest to our work, Zhao (2000) considers a market in which a high-quality firm can signal its quality and at the same time generate aware- 2

4 ness of its product. In a standard single-period price-advertising signaling context he shows that the high-quality firm advertises less than the lowquality firm. This contrasts with our repeat-purchase environment, in which the low-quality firm advertises strictly less than the high-quality firm. 2 The Model We consider a market with a single-product monopolist who sells an experience good over two periods. In the first period, the product is introduced in the market. The product is either of high or low quality, q {q H,q L }. Nature draws high quality with probability λ. The quality is then observed by the firm but not by consumers. At the beginning of the game, consumers neither know the existence nor the quality of the product. In the firstperiod,themonopolistcaninformconsumersabouttheexistenceofits product through advertising. However, the firm cannot make credible informative statements about product quality. The probability that a consumer sees an ad is φ(a) [0, 1], wherea is the expenditure for advertising. The advertising technology is assumed to have decreasing returns. More precisely, we asumme that 0 <φ(a) < 1 for A>0, φ 0 (A) > 0, φ 00 (A) < 0, lim A φ(a) =1, φ(0) = 0, andlim A 0 φ 0 (A) =. 1 These ensure that an interior solution to the firm s maximization problem exists. Since φ is monotonic, we can invert this function to obtain the advertising expenditure A(φ) that is needed to reach a share φ of consumers. Consumers have a willingness to pay v H for high quality and v L <v H for low quality. Since consumers are homogeneous, we abstract from the issue of price signaling by restricting the analysis to those equilibria in which the firm s price is equal to the full expected surplus. 2 In the first period, consumers form expectations about the quality of a product they see advertised as 1 These assumptions are borrowed from the literature on directly informative advertising, see e. g. Grossman and Shapiro (1984). Note that most of the work on directly informative advertising only concerns the existence of a product. For a recent contribution on content advertising, see Anderson and Renault (2006). 2 Here, we follow Tadelis (1999) and Cabral (2000), who made the same assumption in a different context. In our model, full surplus extraction follows from standard equilibrium selection arguments such as the dominance criterion (see Mas-Colell, Whinston, and Green, 1995). 3

5 we will show, the expected probability of high quality is different from the unconditional probability λ. Consumers who have purchased the product in period 1 observe the quality of the product which is then sold in the second period to consumers who know about its existence. To keep the analysis as simple as possible we abstract from the possibility of advertising after the firstperiod. Theaggregatesizeofthemarketisδ in the first period, and 1 δ in the second period. Because information about product quality is released between periods 1 and 2, δ can be interpreted as the (inverse) speed of information revelation. A product with δ =0is a pure credence good. If δ =1, consumers are perfectly informed about product quality before their purchase. The marginal cost of producing one unit of the good is c with v L <c<v H. Hence, the introduction of high quality is socially efficient and the introduction of low quality is not. We abstract from fixed costs of production. Thefollowingtablesummarizesthetimingofthegame. 0 Nature draws the quality of the product, q {H, L}, which is private information of the firm. 1a After observing its type, the firm sets first-period price p 1, spends A on advertising, where A is private information of the firm. A consumer becomes informed about the existence of the product with probability φ(a). 1b Consumers who learn about the product s existence, update their beliefs about product quality, and decide whether to buy. 2a The firm sets the second-period price p 2. 2b Consumers who have bought in period 1 learn the product quality and decide whether to buy again. 3 We solve for perfect Bayesian Nash equilibria. 3 The assumption that only period-1 consumers can buy the product in period 2 has also been made e.g. in Milgrom and Roberts (1986) 4

6 3 Advertising Strategy Before turning to asymmetric information environments, we characterize the solution to monopolist s advertising decision when consumers do not face uncertainty with respect to product quality. We then characterize equilibria in the game in which advertising expenditure is perfectly observable. This will allow us to contrast our results in a market in which advertising expenditure and advertising intensity are unobservable. 3.1 Advertising under Symmetric Information As a benchmark, consider the case that the quality of a product is observable. That is, even though consumers are initially unaware of the existence of a product, they observe its quality before they buy it. Consequently, firms use advertising as a means to inform consumers about a product s existence. A high-quality firm s expected profit is π H =(v H c) φ H A(φ H ). The full information advertising expenditure is uniquely determined by the first-order condition A 0 (φ H)=v H c. (1) Low-quality firms will have negative margins v L c, hence they will not advertise at all. Some properties are immediate: Advertising increases with product value v H but decreases with marginal cost c; it does not depend on δ. Examples. An example is φ =1 e χa. Consequently, the fraction of uninformed consumers after two campaigns is the square of the fraction of uninformed consumers after one campaign. This requires consumer targeting to be impossible. Another example (which however does not satisfy all the regularity assumptions) is A(φ) =φ 2 /2. Thus,φ H = v H c. Wewillreturn to this latter example below. 5

7 3.2 Advertising as a Signal As in the previous subsection, we assume that consumers need to be made aware of a product before purchasing. In contrast to the symmetric-information benchmark, consumers do not observe product quality. In line with most of the signaling literature on advertising, let us for the moment assume that the consumers who see an ad (fraction φ) alsoobservethesizeofthecampaignφ (or A). Consumers who do not happen to see an ad (fraction 1 φ) remain uninformed and do not observe φ; they do not even know about the existence of the product. Informed consumers condition their beliefs on φ. Hence, firms use their advertising effort A not only to make potential consumers aware of their product but possibly also to signal their product quality. For now, let us concentrate on fully separating equilibria. A high-quality firm chooses a critical φ H such that the low-quality firm is indifferent between imitating the strategy of the high-quality firm and not advertising at all. Thus, we are in a fully separating equilibrium in which informative advertising about the existence of the product allows consumers to infer the quality of the firm. If consumers infer the actual quality of a low-quality firm, then they will pay at most v L for the product right from the beginning, and the firm will not produce in the first place. As a consequence, a high-quality firm must choose φ H sufficiently high such that the profits for a low-quality firm that chose the same φ would be non-positive, δφ H (v H c) A(φ H ) 0. Denote the minimal φ H that satisfies the inequality by φ s H. In addition, the incentive constraint of the high-quality firm must be satisfied. In other words, the high-quality firm may want to advertise more than the above φ H if its profits increase from reaching more consumers. If φ H >φ s H (with φ H as in (1)) then the high-quality firm chooses the advertising expenditure A(φ H) instead. In this case, there is no signal distortion (over-advertising), whereas in the case φ H <φ s H, the high-quality firm would have to over-invest in advertising only to deter the low-quality firm from mimicking. Thus, the high-quality firm chooses max{a(φ H),A(φ s H)}. 6

8 Remark 1 When φ is observed by informed consumers, in a separating equilibrium the low-quality firm does not sell and does not advertise. The highquality firm either advertises the same as in the symmetric information case, or it distorts advertising upward to signal that it is of high quality.. Hence, inefficient production of the low-quality product is avoided. However, the high-quality firm advertises above the efficient level. As is well-known in signaling games, typically also pooling equilibria exist in which inefficient production of the low-quality product takes place. In a pooling equilibrium, high and low-quality firm choose the same advertising expenditure A(φ p ). Observing A(φ p ) consumers believe that the product they see advertised is of high quality with probability λ. Thus, they are willing to pay λv H +(1 λ)v L.Ifλv H +(1 λ)v L >cit is profitable for low and high-quality firm to sell the product and pooling equilibria exist. We proceed under this assumption. Applying the dominance criterium as the standard equilibrium refinement (see Mas-Colell, Whinston, and Green, 1995) we focus on the least-cost pooling equilibrium. The share φ p in this equilibrium is uniquely determined as the solution to A 0 (φ) =δ (λv H +(1 λ) v L )+(1 δ) v H c. The associated equilibrium profits are denoted by π p H and πp L, respectively. For this equilibrium to exist, the low-quality firm must make positive profit i.e., φ p δ (λv H +(1 λ) v L c) A(φ p ) 0. We show that the least-cost pooling equilibrium does not survive the intuitive criterion by Cho and Kreps (1987). According to this criterion, we have to show that there exists a deviation φ e that is profitable for the high-quality firm but not for the low-quality firm with the out-of-equilibrium belief that eφ is associated with high quality with probability 1. Taking the smallest value, the incentive constraint for the low-quality firm binds. Hence, φ e has to satisfy φ p δ (λv H +(1 λ) v L c) A(φ p )= e φδ(v H c) A( e φ). 7

9 For given φ p, there exists a unique solution φ e > φ p. To destabilize the pooling equilibrium, it remains to be shown that the deviating high-quality firm obtains a strictly higher profit than in the pooling equilibrium i.e., φ p δ ((λv H +(1 λ) v L c)+(1 δ)(v H c)) A(φ p ) < e φ(v H c) A( e φ). Using the incentive compatibility constraint of the low-quality firm, this inequality reduces to φ p (1 δ)(v H c) < e φ(1 δ)(v H c). It holds for φ p < e φ. Hence, the pooling equilibrium is unstable, in the sense that is does not survive the intuitive criterion Advertising as a Noisy Signal In this subsection, we assume that consumers do not observe φ (nor do they observe A). However, rational consumers will make inferences about product quality from all available information, especially from the fact that they have seen an ad. Assume that, in period 1, consumers expect the average quality ofaproducttobeρ, hence they pay the price ρv H +(1 ρ) v L. Assume furthermore that this price exceeds the marginal cost c, so both high- and low-quality firms produce in the first period (we will discuss the necessary condition later on). In the second period, if the consumer has learned that the value of the product is v L, he is not willing to pay more than that. Because the marginal cost exceeds his valuation, c>v L,thefirm will choose to stop production. The expected profit of a low-quality firm that spends A(φ L ) on advertising is π L = φ L (δ (ρv H +(1 ρ) v L c)+(1 δ)0) A(φ L ). Thus, the first-order condition that defines the level of advertising is A 0 (φ L )=δ (ρv H +(1 ρ) v L c) (2) 4 Note that there is also a continuum of fully separating equilibria. Here, we selected the equlibrium that satisfies the dominance criterion. 8

10 The expected profit of a high-quality firm that spends A(φ H ) on advertising is π H = φ H (δ (ρv H +(1 ρ) v L c)+(1 δ)(v H c)) A(φ H ). A high-quality firm s level of advertising is defined by A 0 (φ H )=δ (ρv H +(1 ρ) v L c)+(1 δ)(v H c). (3) Since A 0 (φ H ) A 0 (φ L )=(1 δ)(v H v L ) > 0 and A 00 > 0, thelevelof advertising by a high-quality firm φ H exceeds that of a low-quality firm φ L. This result is not surprising. From each consumer who is reached by advertising both, high and low-quality firms, earn the same in the first period, but the high-quality firm obtains a positive margin from any period-1 consumer in the second period. Hence, a consumer is relatively more likely to be reached by a high-quality firm; advertising (about the existence of a product) mitigates the asymmetric information problem of the high-quality firm. A consumer with self-fulfilling beliefs who becomes aware of a product through advertising expects that the product is of high quality with probability ρ with λφ ρ = H. (4) λφ H +(1 λ) φ L Clearly ρ>λ; advertising is indirectly informative as it conveys noisy information on product quality. Proposition 1 When φ is not observable, the unique equilibrium is characterized by equations (2), (3), and (4). What determines a firm s advertising expenditure? If high quality is rather valuable (high v H ), the price (at least in the first period) is higher, highquality and low-quality firms want to sell more; their advertising expenditure rises. Hence, dφ H /dv H > 0 and dφ L /dv H > 0. The argument is similar for a product with a high λ. Because the consumers ex ante expectations about product quality increases, they are willing to pay a higher price, and, hence, both firm types advertise more. The following proposition gives a complete picture of the comparative statics results. 9

11 Proposition 2 (Comparative Statics) In equilibrium, φ H > 0, v H φ L > 0, v H φ H > 0, v L φ L 0, v L φ H λ > 0, φ L λ > 0, φ H δ < 0, φ L δ > 0, φ H c < 0, φ L c < 0, ρ > 0, v H ρ < 0, v L ρ λ > 0, ρ δ < 0, ρ c > 0. Most comparative statics properties are straightforward. Concerning dφ H /dδ, we use the implicit function theorem, dφ H dδ = (v H c) φ H (v H c) δ A 0 (φ H ). Here, the numerator is positive. The denominator is negative because A(φ H )= (v H c) δφ H, and due to the assumptions with respect to A( ), A 0 (φ H ) > A(φ H )/φ H. Hencethederivativeispositive. Ifthemarketshareforgoods in period 1 is relatively high (high δ), then a high-quality firm must spend more on advertising in order to deter a low-quality firm from mimicking. Example To obtain a closed-form solution, we impose a functional form on A(φ). Let A(φ) =(α/2) φ 2, c =0, v L =0,andv H = v. 5 Then, for α 5 This example has the property that under symmetric information it does not matter in terms of efficience whether or not low quality is produced. However, selling the low-quality product is necessarily inefficient under asymmetric information (due to costly advertising). In addition, the example does not satisfy lim A φ(a) = 1, but is algebraically tractable. Note that this assumption on φ(a) is only needed to guarantee, in general, a unique, interior solution to various first-order conditions and has no further purpose. An algebraically less tractable example that meets all assumptions on φ(a) is A(φ) =αφ/(1 φ) this has been used in Zhao (2000). 10

12 1 H.5 L Figure 1: Equilibrium advertising as a function of the degree of asymmetric information δ. sufficiently large such that φ H 1, the equilibrium is characterized by φ H = v (1 + (1 2δ)(1 λ)+ψ), 2 α φ L = v ( (1 2δ) λ + Ψ), 2 α λ(1 + (1 2δ)(1 λ)) + λψ ρ = with q λ + Ψ Ψ = 4 δ(1 δ)λ(1 λ)+λ 2 In Figure 1, we set α =1and λ =1/2 and plot φ H and φ L as a function of δ. In particular, this illustrates that the advertising expenditure of the high-quality firm is decreasing in δ. The extent to which consumers update their belief depends on the degree of asymmetric information δ and the level of the prior belief λ, asfigure2 illustrates (we use the same parameter constellation as in the previous figure, except that we allow for different values λ). 11

13 Figure 2: Posterior belief ρ as a function of prior belief λ and the degree of asymmetric information δ 12

14 4 The Role of Consumer Information In this section we point out qualitative differences between the case of observable and unobservable advertising expenditure. Our first finding is immediate: Remark 2 When the advertising expense A(φ) is unobservable, both highand the low-quality firms advertise. By contrast, when A(φ) is observable, only the high-quality firm advertises, and φ L =0. One condition is necessary for this statement. We must have that v L <c. For the opposite case v L >c, a low-quality firm would advertise in the case of observable φ. If the advertising expenditure is observable, a high-quality firm can use the advertising expense as a signal and distort the advertising upward, which is tantamount to raising φ H. If it is unobservable, the low-quality firm can hide behind the advertising effort of the low-quality firm and reduce the willingness to pay for period-1 consumption. Proposition 3 Relative to the symmetric information setting, the high-quality firm weakly overinvests if φ is observable. It strictly underinvests if φ is unobservable. As discussed in the previous section, the fact that max{φ H,φ s H} φ H establishes the first part of the proposition. Concerning the second part of the proposition, compare (3) with the equation that defines φ H, namely A 0 (φ H)=v H c. Because v H c exceeds the right-hand side of (3), φ H exceeds the solution to (3). Since a low-quality product is not advertised in separating equilibrium when the level of advertising is observable, while it is strictly positive when it is unobservable, the previous remark implies the following: Remark 3 In separating equilibrium, the difference φ H φ L is larger when the level of advertising is observable compared to when it is unobservable. 13

15 [missing: results on industry advertising expenditure] The following remark shows that comparative statics with respect to the degree of asymmetric information δ differ depending on whether φ is observable or not. Remark 4 If φ is observable and there is signal distortion (over-advertising), then dφ H /dδ > 0. Ifφ is unobservable, however, then dφ H /dδ < 0. The argument goes as follows. If φ is unobservable, high and low-quality firms have to pool. A higher δ then means that the information asymmetry problem becomes more severe, and the experience good character of the product becomes more pronounced. Hence, φ H and φ L converge against one another. φ H decreases, whereas φ L increases. In a separating equilibrium where φ is observable, a higher δ again implies that the information asymmetry problem is more severe. The incentives of low-quality firms to mimic the high-quality firms behavior is larger. Hence, the high-quality firms must choose a higher φ s H to make their strategy credible. There are a number of additional comparative statics that differ depending on whether φ is observable. In particular, a separating equilibrium does not depend on v L or λ. If φ is unobservable, both φ H and φ L depend on v L and λ, and so does the expected quality in the first period; dρ/dλ > 0 and dρ/dv L < 0. With observable φ, alow-qualityfirm does not produce; hence, ρ =1.With unobservable φ, a higher value of high quality v H makes advertising more valuable, especially for high-quality firms. Consequently, these firms expand their advertising volume, and the expected quality of goods increases, dρ/dv H > 0. These comparative statics properties are in principal testable. Empirical work may therefore be able to provide evidence whether the hypothesis of non-observability of the advertising expenditure is supported by the data. 14

16 5 Discussion A key variable in our analysis is the degree of asymmetric information. In particular, in Remark 4, we obtained qualitatively different comparative statics properties depending on whether φ is observable. Depending on the application, there are particular interpretations of δ. For instance, in the market for restaurants, in places with a small numberoftouristsrepeatpurchaseisimportantandδ takes a low value, while in places with a large number of tourists repeat purchase is less important. In other markets δ can be interpreted as the speed of changing tastes. Markets with fast changing tastes i.e., where fashions and fads are prominent are characterized by a high δ. In age-segmented markets tastes of younger people may change more frequently so that for these consumers repeat purchase is less often an option which is reflected by a high δ. In markets such as those for mobile calling plans, the duration of the contract is an important variable. The shorter the length of the contract, the higher the repurchase frequency and, thus, the higher δ. When advertising expenditures are unobservable, we should observe a negative correlation between contract length and advertising levels of high-quality firms. By contrast, when advertising expenditures are observable we should observe a positive correlation. 6 We have assumed that the net value of a low-quality product is negative, v L <c. As a consequence, if advertising was observable, a lowquality firm did not advertise at all. If we instead assume that v L >c, then a low-quality firm will produce and advertise even in a separating equilibrium. However, it will advertise more when φ is unobservable. Hence, the qualitative result that, when φ is observable, a low-quality advertises less, whereas a high-quality firm advertises more remains valid. We have assumed that firms advertise only in period 1. In period 2, the advertisements are still effective, and it is not possible to advertise anew. In a more general model, one could allow for advertising in the second period. Whether firms choose to advertise at all at date 2 depends on the structure of the cost function A(φ 1,φ 2 ) if φ 1 and φ 2 are 6 As a health warning, our insights obtain in a monopoly setting. A non-trivial extension is to include competitive effects in the analysis. 15

17 the levels of advertising in the two periods. For example, if A depends only on the sum φ 1 + φ 2, firms would advertise only at date 1. Now, if the structure of A is such that some firm chooses to advertise at date 2, we may postulate that low-quality firms will by then have revealed themselves to be of low quality to everybody who is informed of the existence of the product in period 2. Thus they will gone out of business in period 2, and only high-quality firms will advertise. Consequently, the possibility to advertise at date 2 can be interpreted as a bonus for high-quality firms. The level of the advertising effort at date 1 can be influenced, but the structure of the information problem of the consumer will be qualitatively unaffected. [downward sloping demand curve. To be written.] 6 Conclusion This paper has developed a simple repeat-purchase advertising model in which consumers initially neither know about the existence of a product nor the quality of an experience good. We compare a market in which the total advertising expenditure is observable to a market in which this is not the case. In the former market,the high-quality firm can fully separate itself from low quality and signal its quality through advertising. Such advertising is not fully wasteful since it makes more consumers aware of the product. By contrast, in the latter market, the high-quality firm cannot fully separate itself from low quality. However, due to the repeat-purchase effect, the highquality firm has a stronger incentive to advertise. This allows consumers to draw inferences from the fact that they see an ad i.e., the belief of consumers who become informed about the existence of the product are more optimistic than the prior belief. From a social perspective, when advertising expenditures are observable, possibly excessive advertising by the high-quality firm give rise to a welfare loss compared to symmetric information. By contrast, when advertising is not observable, insufficient advertising by the high-quality firm and excessive advertising by the low-quality firm give rise to a welfare loss compared to symmetric information. 16

18 References [1] Anderson, S. P. and R. Renault (2006), Advertising Content, American Economic Review, 96(1), [2] Bagwell, K. (2005), The Economic Analysis of Advertising, in: Armstrong and Porter (eds.), Handbook of Industrial Organization, vol 3. [3] Cabral, L. (2000), Stretching Firm and Brand Reputation, Rand Journal of Economics, 31(4), [4] Cho, I. K. and D. M. Kreps (1987), Signaling Games and Stable Equilibria, Quarterly Journal of Economics, 102, [5] Grossman, G. and C. Shapiro (1984), Informative Advertising with Differentiated Products, Review of Economic Studies, 51(1), [6] Hertzendorf, M. (1993), I Am not a High-Quality Firm but I Play one on TV, Rand Journal of Economics 24, [7] Kihlstrom, R. and M. Riordan (1984), Advertising as a signal, Journal of Political Economy, 92(3), [8] Linnemer, L. (2002), Price and Advertising as Signals of quality when Some Consumers are Informed, International Journal of Industrial Organization, 20(7), [9] Mas-Colell, A., M. D. Whinston, and J. R. Green (1995), Microeconomic Theory, Oxford University Press, Oxford. [10] Milgrom, P., and J. Roberts (1986), Price and Advertising Signals of Product Quality, JournalofPoliticalEconomy, 94(4), [11] Moraga, J.-L. (2000), Quality Uncertainty and Informative Advertising, International Journal of Industrial Economics, 18(4), [12] Nelson, P. (1970), Information and Consumer Behavior, Journal of Political Economy, 78(2), [13] Nelson, P. (1974), Advertising as Information, Journal of Political Economy, 82(4),

19 [14] Tadelis, S. (1999), What s in a Name? Reputation as a Tradeable Asset, American Economic Review, 89(3), [15] Tirole, J. (1988), The Theory of Industrial Organization, MIT Press, Cambridge. [16] Zhao, H. (2000), Raising Awareness and Signaling Quality to Uninformed Consumers: A Price-Advertising Model, Marketing Science, 19(4),

Dynamic Pricing in Experience Good Markets with Demand Uncertainty

Dynamic Pricing in Experience Good Markets with Demand Uncertainty Dynamic Pricing in Experience Good Markets with Demand Uncertainty Yu-Hung Chen and Baojun Jiang January 2015 Abstract This paper develops a dynamic model to examine how a firm with a new, non-durable

More information

Signaling Quality Through Prices in an Oligopoly.

Signaling Quality Through Prices in an Oligopoly. Signaling Quality Through Prices in an Oligopoly. Maarten C.W. Janssen University of Vienna, Austria and Tinbergen Institute Rotterdam, The Netherlands. Santanu Roy Southern Methodist University, Dallas,

More information

FDI as a signal of quality *

FDI as a signal of quality * FDI as a signal of quality * Seiichi Katayama * and Kaz Miyagiwa ** Abstract: This paper considers a new-product firm s choice between exporting and foreign direct investment (FDI) to access foreign markets.

More information

SONDERFORSCHUNGSBEREICH 504

SONDERFORSCHUNGSBEREICH 504 SONDERFORSCHUNGSBEREICH 504 Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung No. 04-51 Umbrella Branding and the Provision of Quality Hendrik Hakenes and Martin Peitz November

More information

Econ 101A Solutions for Final exam - Fall 2006

Econ 101A Solutions for Final exam - Fall 2006 Econ 101A Solutions for Final exam - Fall 2006 Problem 1. Shorter problems. (35 points) Solve the following shorter problems. 1. Consider the following (simultaneous) game of chicken. This is a game in

More information

Online shopping and platform design with ex ante registration requirements

Online shopping and platform design with ex ante registration requirements Online shopping and platform design with ex ante registration requirements O A Florian Morath Johannes Münster June 17, 2016 This supplementary appendix to the article Online shopping and platform design

More information

Dynamic Pricing and Price Commitment of New Experience Goods

Dynamic Pricing and Price Commitment of New Experience Goods Dynamic Pricing and Price Commitment of New Experience Goods Yu-Hung Chen National Taiwan University, Taipei, Taiwan, yhchen@ntu.edu.tw Baojun Jiang Washington University in St. Louis, St. Louis, MO 63130,

More information

First-Price Auctions with General Information Structures: A Short Introduction

First-Price Auctions with General Information Structures: A Short Introduction First-Price Auctions with General Information Structures: A Short Introduction DIRK BERGEMANN Yale University and BENJAMIN BROOKS University of Chicago and STEPHEN MORRIS Princeton University We explore

More information

Credence goods. Even when the success of the service is observable to the consumer ex post, consumers typically

Credence goods. Even when the success of the service is observable to the consumer ex post, consumers typically Credence goods Credence goods: products and services purchased from informed experts such as auto mechanics, home improvement contractors, appliance service-persons, physicians, lawyers... The provider

More information

Bundling Can Signal High Quality

Bundling Can Signal High Quality Bundling Can Signal High Quality Very Preliminary and Full of Mistakes James D. Dana Jr. Northeastern University April 3, 2017 Abstract Bundling experience goods can signal high quality, even in simple

More information

Umbrella Branding Can Leverage Reputation, but only with Market Power. May 19, Eric B. Rasmusen

Umbrella Branding Can Leverage Reputation, but only with Market Power. May 19, Eric B. Rasmusen Umbrella Branding Can Leverage Reputation, but only with Market Power May 19, 2012 Eric B. Rasmusen Dan R. and Catherine M. Dalton Professor, Department of Business Economics and Public Policy, Kelley

More information

Buyer Heterogeneity and Dynamic Sorting in Markets for Durable Lemons

Buyer Heterogeneity and Dynamic Sorting in Markets for Durable Lemons Buyer Heterogeneity and Dynamic Sorting in Markets for Durable Lemons Santanu Roy Southern Methodist University, Dallas, Texas. October 13, 2011 Abstract In a durable good market where sellers have private

More information

Asset Price Bubbles and Endogenous Growth [PRELIMINARY DRAFT] Abstract

Asset Price Bubbles and Endogenous Growth [PRELIMINARY DRAFT] Abstract Asset Price Bubbles and Endogenous Growth [PRELIMINARY DRAFT] Jong Kook Shin 1 Chetan Subramanian 2 Abstract This paper extends a simple Schumpeterian growth model to demonstrate that bubbles can generate

More information

Price Signaling in a Two-Market Duopoly

Price Signaling in a Two-Market Duopoly The University of Akron IdeaExchange@UAkron Honors Research Projects The Dr. Gary B. and Pamela S. Williams Honors College Spring 2016 Price Signaling in a Two-Market Duopoly Matthew Hughes University

More information

Does Signaling Solve the Lemons Problem? Timothy Perri * March 31, Abstract

Does Signaling Solve the Lemons Problem? Timothy Perri * March 31, Abstract Does Signaling Solve the Lemons Problem? by Timothy Perri * March 31, 2015 Abstract Maybe. Lemons and signaling models generally deal with different welfare problems, the former with withdrawal of high

More information

Uniform and Targeted Advertising with Shoppers and. Asymmetric Loyal Market Shares

Uniform and Targeted Advertising with Shoppers and. Asymmetric Loyal Market Shares Uniform and Targeted dvertising with Shoppers and symmetric Loyal Market Shares Michael rnold, Chenguang Li and Lan Zhang October 9, 2012 Preliminary and Incomplete Keywords: informative advertising, targeted

More information

Part II. Market power

Part II. Market power Part II. Market power Chapter 3. Static imperfect competition Slides Industrial Organization: Markets and Strategies Paul Belleflamme and Martin Peitz Cambridge University Press 2009 Introduction to Part

More information

Beliefs, Market Size and Consumer Search

Beliefs, Market Size and Consumer Search Beliefs, Market Size and Consumer Search Maarten Janssen and Sandro Shelegia March 30, 2014 Abstract We analyze how the market power of firms in consumer search markets depends on how consumers form beliefs

More information

Online shopping and platform design with ex ante registration requirements. Online Appendix

Online shopping and platform design with ex ante registration requirements. Online Appendix Online shopping and platform design with ex ante registration requirements Online Appendix June 7, 206 This supplementary appendix to the article Online shopping and platform design with ex ante registration

More information

Beliefs, Market Size and Consumer Search

Beliefs, Market Size and Consumer Search Beliefs, Market Size and Consumer Search (PRELIMINARY AND INCOMPLETE) Maarten Janssen and Sandro Shelegia February 15, 2014 Abstract We analyze two unexplored aspects of the Wolinsky model (Wolinsky (1986)

More information

Download for Free - When Do Providers of Digital Goods Offer Free Samples?

Download for Free - When Do Providers of Digital Goods Offer Free Samples? Download for Free - When Do Providers of Digital Goods Offer Free Samples? Anette Boom Copenhagen Business School September 2004 Abstract In a monopoly setting where consumers cannot observe the quality

More information

Homogeneous Platform Competition with Heterogeneous Consumers

Homogeneous Platform Competition with Heterogeneous Consumers Homogeneous Platform Competition with Heterogeneous Consumers Thomas D. Jeitschko and Mark J. Tremblay Prepared for IIOC 2014: Not Intended for Circulation March 27, 2014 Abstract In this paper we investigate

More information

ARTICLE IN PRESS. European Economic Review

ARTICLE IN PRESS. European Economic Review European Economic Review 53 (2009) 186 196 Contents lists available at ScienceDirect European Economic Review journal homepage: www.elsevier.com/locate/eer Umbrella branding and external certification

More information

Demo or No Demo: Supplying Costly Signals to Improve Profits

Demo or No Demo: Supplying Costly Signals to Improve Profits Demo or No Demo: Supplying Costly Signals to Improve Profits by Fan Li* Abstract Many software and video game firms offer a free demo with limited content to help buyers better assess the likely value

More information

Learning Quality from Prices and Word-of-Mouth Communication

Learning Quality from Prices and Word-of-Mouth Communication Learning Quality from Prices and Word-of-Mouth Communication Carla Guadalupi May 10, 2016 Abstract This paper studies the eect of word-of-mouth communication on the optimal pricing strategy for new experience

More information

Price competition in a differentiated products duopoly under network effects

Price competition in a differentiated products duopoly under network effects Price competition in a differentiated products duopoly under network effects Krina Griva Nikolaos Vettas February 005 Abstract We examine price competition under product-specific network effects, in a

More information

Demo or No Demo: Supplying Costly Signals to Improve Profits

Demo or No Demo: Supplying Costly Signals to Improve Profits Demo or No Demo: Supplying Costly Signals to Improve Profits by Fan Li* University of Florida Department of Economics, P.O.Box 117140 Gainesville, FL 32611-7140 Email: lifan51@ufl.edu Tel:1-352-846-5475

More information

Controlling Information to Influence Consumer Beliefs

Controlling Information to Influence Consumer Beliefs Controlling Information to Influence Consumer Beliefs Quyen Nguyen University of Arizona November 14, 2015 Abstract Access to product information changes a consumer s initial belief about the product s

More information

A Note on Costly Sequential Search and Oligopoly Pricing

A Note on Costly Sequential Search and Oligopoly Pricing TI 2004-068/1 Tinbergen Institute Discussion Paper A Note on Costly Sequential Search and Oligopoly Pricing Maarten C.W. Janssen José Luis Moraga-González* Matthijs R. Wildenbeest Faculty of Economics,

More information

Comparative Price Signaling by a Multiproduct Firm

Comparative Price Signaling by a Multiproduct Firm Comparative Price Signaling by a Multiproduct Firm Michael R. Baye and Rick Harbaugh May, 013 Abstract Existing work on price signaling finds that, in the absence of reputational or other effects, a firm

More information

DEPARTMENT OF ECONOMICS

DEPARTMENT OF ECONOMICS ISSN 0819-2642 ISBN 0 7340 2600 5 THE UNIVERSITY OF MELBOURNE DEPARTMENT OF ECONOMICS RESEARCH PAPER NUMBER 944 JULY 2005 SNOBS AND QUALITY GAPS by Suren Basov Department of Economics The University of

More information

Copyright (C) 2001 David K. Levine This document is an open textbook; you can redistribute it and/or modify it under the terms of version 1 of the

Copyright (C) 2001 David K. Levine This document is an open textbook; you can redistribute it and/or modify it under the terms of version 1 of the Copyright (C) 2001 David K. Levine This document is an open textbook; you can redistribute it and/or modify it under the terms of version 1 of the open text license amendment to version 2 of the GNU General

More information

Do not open this exam until told to do so. Solution

Do not open this exam until told to do so. Solution Do not open this exam until told to do so. Department of Economics College of Social and Applied Human Sciences K. Annen, Fall 003 Final (Version): Intermediate Microeconomics (ECON30) Solution Final (Version

More information

Durable Goods, Innovation and Network Externalities

Durable Goods, Innovation and Network Externalities Durable Goods, Innovation and Network Externalities Daniel CERQUERA March 15, 2005 Abstract We present a model of R&D competition between an incumbent and a potential entrant with network externalities

More information

Advanced Microeconomic Theory. Chapter 7: Monopoly

Advanced Microeconomic Theory. Chapter 7: Monopoly Advanced Microeconomic Theory Chapter 7: Monopoly Outline Barriers to Entry Profit Maximization under Monopoly Welfare Loss of Monopoly Multiplant Monopolist Price Discrimination Advertising in Monopoly

More information

The economics of competitive markets Rolands Irklis

The economics of competitive markets Rolands Irklis The economics of competitive markets Rolands Irklis www. erranet.org Presentation outline 1. Introduction and motivation 2. Consumer s demand 3. Producer costs and supply decisions 4. Market equilibrium

More information

Informative advertising by an environmental group

Informative advertising by an environmental group Informative advertising by an environmental group Pim Heijnen January 2007 Abstract Consuming a product does not (necessarily) reveal the environmental damage of the good. In terms of environmental damage,

More information

Expectations, Network Effects and Platform Pricing

Expectations, Network Effects and Platform Pricing Expectations, Network Effects and Platform Pricing Andrei Hagiu and Hanna Halaburda December 18, 2011 Abstract In markets with network effects, users must form expectations about the total number of users

More information

Recent Developments in the Theory of Regulation

Recent Developments in the Theory of Regulation Recent Developments in the Theory of Regulation Mark Armstrong and David E.M. Sappington Presented by: Bruno Martins Phillip Ross Arthur Smith November 10, 2014 Armstrong & Sappington Theory of Regulation

More information

Notes and Comments on Search Costs and. Equilibrium Price Dispersion. Moshe Barach. Based on Information, Search and Price Dispersion

Notes and Comments on Search Costs and. Equilibrium Price Dispersion. Moshe Barach. Based on Information, Search and Price Dispersion Notes and Comments on Search Costs and Equilibrium Price Dispersion Moshe Barach Based on Information, Search and Price Dispersion By Michael R. Baye, John Morgan, and Patrick Scholten Various models of

More information

TOPIC 4. ADVERSE SELECTION, SIGNALING, AND SCREENING

TOPIC 4. ADVERSE SELECTION, SIGNALING, AND SCREENING TOPIC 4. ADVERSE SELECTION, SIGNALING, AND SCREENING In many economic situations, there exists asymmetric information between the di erent agents. Examples are abundant: A seller has better information

More information

Competition, Disclosure and Signaling.

Competition, Disclosure and Signaling. Competition, Disclosure and Signaling. Maarten C.W. Janssen University of Vienna, Austria. Santanu Roy Southern Methodist University, Dallas, Texas. December 6, 2012 Abstract Competition creates strategic

More information

Mass versus Direct Advertising and Product Quality

Mass versus Direct Advertising and Product Quality Journal of Economic Theory and Econometrics, Vol. 29, No. 3, Sep. 2018, 1 22 Mass versus Direct Advertising and Product Quality Lola Esteban José M. Hernández Abstract This paper analyzes how the use of

More information

Targeted Advertising on Competing Platforms

Targeted Advertising on Competing Platforms Targeted Advertising on Competing Platforms Siqi Pan and Huanxing Yang Department of Economics, Ohio State University March 23, 2015 Abstract This paper studies targeted advertising in two-sided markets.

More information

Renting or Selling A Strategic Choice in a Durable Good Market

Renting or Selling A Strategic Choice in a Durable Good Market Renting or Selling A Strategic Choice in a Durable Good Market Manas Paul Indira Gandhi Institute of Development Research Gen. Vaidya Marg Goregaon (East) Bombay 400 065. Sougata Poddar Department of Economics

More information

Bundling Industrial Organisation Theory

Bundling Industrial Organisation Theory Bundling Industrial Organisation Theory Mario Hofer, 05106575 February 12, 2006 Abstract In this paper, we look at commodity bundling and tie-in sales. Basically there are three incentives to firms to

More information

Advance Selling, Competition, and Brand Substitutability

Advance Selling, Competition, and Brand Substitutability Advance Selling, Competition, and Brand Substitutability Oksana Loginova October 27, 2016 Abstract This paper studies the impact of competition on the benefits of advance selling. I construct a two-period

More information

1.. Consider the following multi-stage game. In the first stage an incumbent monopolist

1.. Consider the following multi-stage game. In the first stage an incumbent monopolist University of California, Davis Department of Economics Time: 3 hours Reading time: 20 minutes PRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Industrial Organization June 27, 2006 Answer four of the six

More information

Econ 121b: Intermediate Microeconomics

Econ 121b: Intermediate Microeconomics Econ 11b: Intermediate Microeconomics Dirk Bergemann, Spring 01 Week of 3/6-4/3 1 Lecture 16: Imperfectly Competitive Market 1.1 Price Discrimination In the previous section we saw that the monopolist

More information

SHORT QUESTIONS AND ANSWERS FOR ECO402

SHORT QUESTIONS AND ANSWERS FOR ECO402 SHORT QUESTIONS AND ANSWERS FOR ECO402 Question: How does opportunity cost relate to problem of scarcity? Answer: The problem of scarcity exists because of limited production. Thus, each society must make

More information

Expanding Demand through Price Advertisement

Expanding Demand through Price Advertisement Expanding Demand through Price Advertisement Hideo Konishi Michael T. Sandfort June 21, 2001 Abstract Retail stores frequently advertise prices. When consumer search is costly, advertising low prices expands

More information

TIERS, ADVERTISEMENT AND PRODUCT DESIGN

TIERS, ADVERTISEMENT AND PRODUCT DESIGN TIERS, ADVERTISEMENT AND PRODUCT DESIGN IN-KOO CHO, SUSUMU IMAI, AND YUKA ONO ABSTRACT. A multi-product firm typically pools different products into tiers and advertises the tier instead of individual

More information

Module 11: A Simple Model of Reputation - Moral Hazard and Product Quality

Module 11: A Simple Model of Reputation - Moral Hazard and Product Quality Module 11: A Simple Model of Reputation - Moral Hazard and Product Quality Information Economics (Ec 515) George Georgiadis Consider a firm that sells an experience good. Experience good: product or service

More information

Universidade de Aveiro Departamento de Economia, Gestão e Engenharia Industrial. Documentos de Trabalho em Economia Working Papers in Economics

Universidade de Aveiro Departamento de Economia, Gestão e Engenharia Industrial. Documentos de Trabalho em Economia Working Papers in Economics Universidade de Aveiro Departamento de Economia, Gestão e Engenharia Industrial Documentos de Trabalho em Economia Working Papers in Economics Área Científica de Economia E/nº 4/007 Discriminatory Limit

More information

Simple Market Equilibria with Rationally Inattentive Consumers

Simple Market Equilibria with Rationally Inattentive Consumers Simple Market Equilibria with Rationally Inattentive Consumers Filip Matějka and Alisdair McKay January 16, 2012 Prepared for American Economic Review Papers and Proceedings Abstract We study a market

More information

Industrial Organization

Industrial Organization Industrial Organization Session 4: The Monopoly Jiangli Dou School of Economics Jiangli Dou (School of Economics) Industrial Organization 1 / 43 Introduction In this session, we study a theory of a single

More information

Quality Choice, Fixed Costs and Equilibrium in Models of Vertical Differentiation 1

Quality Choice, Fixed Costs and Equilibrium in Models of Vertical Differentiation 1 Quality Choice, Fixed Costs and Equilibrium in Models of Vertical Differentiation 1 Matteo Alvisi April 000 University of Bologna Department of Economics Abstract: I provide a full characterization of

More information

Part III. Sources of market power. Chapter 6. Advertising and related marketing strategies

Part III. Sources of market power. Chapter 6. Advertising and related marketing strategies Part III. Sources of market power Chapter 6. Advertising and related marketing strategies Slides Industrial Organization: Markets and Strategies Paul Belleflamme and Martin Peitz, 2d Edition Cambridge

More information

Communicating quality: a unified model of disclosure and signaling

Communicating quality: a unified model of disclosure and signaling Communicating quality: a unified model of disclosure and signaling Andrew F. Daughety* Jennifer F. Reinganum* ABSTRACT Firms communicate product quality to consumers through a variety of channels. Economic

More information

Markets with interested advisors On brokers, matchmakers, and middlemen

Markets with interested advisors On brokers, matchmakers, and middlemen Markets with interested advisors On brokers, matchmakers, and middlemen Marco A. Haan Linda A. Toolsema VERY PRELIMINARY PLEASE DO NOT QUOTE December 27, 2008 Abstract We study markets in which brokers,

More information

NBER WORKING PAPER SERIES TYING, UPGRADES, AND SWITCHING COSTS IN DURABLE-GOODS MARKETS. Dennis W. Carlton Michael Waldman

NBER WORKING PAPER SERIES TYING, UPGRADES, AND SWITCHING COSTS IN DURABLE-GOODS MARKETS. Dennis W. Carlton Michael Waldman NBER WORKING PAPER SERIES TYING, UPGRADES, AND SWITCHING COSTS IN DURABLE-GOODS MARKETS Dennis W. Carlton Michael Waldman Working Paper 11407 http://www.nber.org/papers/w11407 NATIONAL BUREAU OF ECONOMIC

More information

Oligopoly Theory (11) Collusion

Oligopoly Theory (11) Collusion Oligopoly Theory (11) Collusion Aim of this lecture (1) To understand the idea of repeated game. (2) To understand the idea of the stability of collusion. Oligopoly Theory 1 Outline of the 11th Lecture

More information

Notes from Tirole, ch. 2 Product Selection, Quality, and Advertising

Notes from Tirole, ch. 2 Product Selection, Quality, and Advertising MEMO To: From: File FM Date: October 218 Subject: Notes from Tirole, ch. 2 Product Selection, Quality, and Advertising Defining a market is not easy. Think of examples from Merger Enforcement Guidelines.

More information

Entry Deterrence in Durable-Goods Monopoly

Entry Deterrence in Durable-Goods Monopoly Entry Deterrence in Durable-Goods Monopoly Heidrun C. Hoppe University of Hamburg In Ho Lee University of Southampton January 14, 2000 Abstract Some industries support Schumpeter s notion of creative destruction

More information

Strategic Alliances, Joint Investments, and Market Structure

Strategic Alliances, Joint Investments, and Market Structure Strategic Alliances, Joint Investments, and Market Structure Essi Eerola RUESG, University of Helsinki, Helsinki, Finland Niku Määttänen Universitat Pompeu Fabra, Barcelona, Spain and The Research Institute

More information

The Relevance of a Choice of Auction Format in a Competitive Environment

The Relevance of a Choice of Auction Format in a Competitive Environment Review of Economic Studies (2006) 73, 961 981 0034-6527/06/00370961$02.00 The Relevance of a Choice of Auction Format in a Competitive Environment MATTHEW O. JACKSON California Institute of Technology

More information

Hard to Get, Easy to Lose Endogenous Reputation and Underinvestment

Hard to Get, Easy to Lose Endogenous Reputation and Underinvestment Hard to Get, Easy to Lose Endogenous Reputation and Underinvestment Guillermo L. Ordoñez July, 2007 Abstract Reputation concerns may help to achieve efficiency in cases where imperfect information impedes

More information

Imperfect Price Information and Competition

Imperfect Price Information and Competition mperfect Price nformation and Competition Sneha Bakshi April 14, 2016 Abstract Price competition depends on prospective buyers information regarding market prices. This paper illustrates that if buyers

More information

Price setting in a differentiated-product duopoly with asymmetric information. about demand * Miguel Ángel Ropero García

Price setting in a differentiated-product duopoly with asymmetric information. about demand * Miguel Ángel Ropero García Price setting in a differentiated-product duopoly with asymmetric information about demand * Miguel Ángel Ropero García Department of Applied Economics University of Malaga El Ejido 6, 29071 Malaga Spain

More information

The Basic Spatial Model with a Single Monopolist

The Basic Spatial Model with a Single Monopolist Economics 335 March 3, 999 Notes 8: Models of Spatial Competition I. Product differentiation A. Definition Products are said to be differentiated if consumers consider them to be imperfect substitutes.

More information

Experience goods and provision of quality. Kultti, Klaus Kalervo

Experience goods and provision of quality. Kultti, Klaus Kalervo https://helda.helsinki.fi Experience goods and provision of quality Kultti, Klaus Kalervo 2017-04-28 Kultti, K K 2017, ' Experience goods and provision of quality ', Economics. Discussion papers, vol.

More information

Managerial Economics, 01/12/2003. A Glossary of Terms

Managerial Economics, 01/12/2003. A Glossary of Terms A Glossary of Terms The Digital Economist -A- Abundance--A physical or economic condition where the quantity available of a resource exceeds the quantity desired in the absence of a rationing system. Arbitrage

More information

Frequent flyer programs and dynamic contracting with limited commitment

Frequent flyer programs and dynamic contracting with limited commitment Frequent flyer programs and dynamic contracting with limited commitment Emil Temnyalov October 14, 2014 Abstract I present a novel contract theoretic explanation of the profitability and management of

More information

OPTIMAL RENTING/SELLING STRATERGIES IN OLIGOPOLY DURABLE GOODS MARKETS. Golovko Sergiy

OPTIMAL RENTING/SELLING STRATERGIES IN OLIGOPOLY DURABLE GOODS MARKETS. Golovko Sergiy OPTIMAL RENTING/SELLING STRATERGIES IN OLIGOPOLY DURABLE GOODS MARKETS by Golovko Sergiy A thesis submitted in partial fulfillment of the requirements for the degree of MA in Economics Kyiv School of Economics

More information

econstor Make Your Publications Visible.

econstor Make Your Publications Visible. econstor Make Your Publications Visible. A Service of Wirtschaft Centre zbwleibniz-informationszentrum Economics Hakenes, Hendrik; Peitz, Martin Working Paper Umbrella branding and the provision of quality

More information

Newspapers. Joel Sobel. Mullainathan- Shleifer. Newspapers. Gentzkow- Shapiro. Ellman and Germano. Posner. Joel Sobel. UCSD and UAB.

Newspapers. Joel Sobel. Mullainathan- Shleifer. Newspapers. Gentzkow- Shapiro. Ellman and Germano. Posner. Joel Sobel. UCSD and UAB. UCSD and UAB 15 February 2007 ISSUES What do papers sell? Origin and Persistence of Bias? Does Competition Improve Outcomes? Relevance: Production and Consumption of Information in Group Environments.

More information

14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 7, Lecture 22

14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 7, Lecture 22 Monopoly. Principles of Microeconomics, Fall Chia-Hui Chen November, Lecture Monopoly Outline. Chap : Monopoly. Chap : Shift in Demand and Effect of Tax Monopoly The monopolist is the single supply-side

More information

WARWICK ECONOMIC RESEARCH PAPERS

WARWICK ECONOMIC RESEARCH PAPERS Reviews, Prices and Endogenous Information Transmission Luciana A Nicollier No 1029 WARWICK ECONOMIC RESEARCH PAPERS DEPARTMENT OF ECONOMICS Reviews, Prices and Endogenous Information Transmission Luciana

More information

Search markets: Introduction

Search markets: Introduction Search markets: Introduction Caltech Ec106 (Caltech) Search Feb 2010 1 / 16 Why are prices for the same item so different across stores? (see evidence) A puzzle considering basic economic theory: review

More information

The Role of Price Floor in a Differentiated Product Retail Market 1

The Role of Price Floor in a Differentiated Product Retail Market 1 The Role of Price Floor in a Differentiated Product Retail Market 1 Barna Bakó 2 Corvinus University of Budapest Hungary 1 I would like to thank the anonymous referee for the valuable comments and suggestions,

More information

Competition, Disclosure and Signaling

Competition, Disclosure and Signaling Competition, Disclosure and Signaling Maarten C.W. Janssen Santanu Roy September 15, 2013 Abstract Competition creates strategic incentives for firms to communicate private information about product quality

More information

Midterm Review. B. How should the government intervene? - Often multiple options; to choose, need answer to know effects of policies.

Midterm Review. B. How should the government intervene? - Often multiple options; to choose, need answer to know effects of policies. 14.41 Public Economics Section Handout #5 Midterm Review I. Intro to Public Economics & Micro Review A. When should the government intervene? - Lesson of basic micro: the private market equilibrium is

More information

Temporary Protection and Technology Choice under the Learning Curve

Temporary Protection and Technology Choice under the Learning Curve Temporary Protection and Technology Choice under the Learning Curve E. Young Song 1 Sogang University This paper examines the effects of temporary protection in a model of international Cournot competition

More information

Strategic R and D investments with uncertainty. Abstract

Strategic R and D investments with uncertainty. Abstract Strategic R and D investments with uncertainty Toshihiro Matsumura Institute of Social Science, University of Tokyo Abstract I introduce uncertainty into the model of strategic cost reducing R and D investments

More information

Price ceilings and quality competition. Abstract

Price ceilings and quality competition. Abstract Price ceilings and quality competition Alexander Kemnitz University of Mannheim Cyrus Hemmasi University of Mannheim Abstract This paper investigates the quality implications of an upper limit on product

More information

Part IV. Pricing strategies and market segmentation

Part IV. Pricing strategies and market segmentation Part IV. Pricing strategies and market segmentation Chapter 8. Group pricing and personalized pricing Slides Industrial Organization: Markets and Strategies Paul Belleflamme and Martin Peitz Cambridge

More information

DEPARTMENT OF ECONOMICS

DEPARTMENT OF ECONOMICS DEPARTMENT OF ECONOMICS JOHANNES KEPLER UNIVERSITY OF LINZ Spatial Competition with Capacity Constraints and Subcontracting by Matthias HUNOLD Johannes MUTHERS Working Paper No. 1813 October 2018 Johannes

More information

Notes on Intertemporal Consumption Choice

Notes on Intertemporal Consumption Choice Paul A Johnson Economics 304 Advanced Topics in Macroeconomics Notes on Intertemporal Consumption Choice A: The Two-Period Model Consider an individual who faces the problem of allocating their available

More information

A Signaling Theory of Limited Supply

A Signaling Theory of Limited Supply 1 A Signaling Theory of Limited Supply by Taradas Bandyopadhyay, Baomin Dong, and Cheng-Zhong Qin * Received June 19, 2016; accepted June 20, 2017 This paper analyzes the role of seller-induced shortage

More information

econstor Make Your Publications Visible.

econstor Make Your Publications Visible. econstor Make Your Publications Visible. A Service of Wirtschaft Centre zbwleibniz-informationszentrum Economics Hakenes, Hendrik; Peitz, Martin Working Paper Umbrella branding and external certification

More information

Sell-outs, Beliefs and Bandwagon Behavior - Draft

Sell-outs, Beliefs and Bandwagon Behavior - Draft Sell-outs, Beliefs and Bandwagon Behavior - Draft Nick Vikander Fall 2011 Abstract This paper examines how a firm can strategically choose its capacity to manipulate consumer beliefs about aggregate demand.

More information

Quasi linear Utility and Two Market Monopoly

Quasi linear Utility and Two Market Monopoly Quasi linear Utility and Two Market Monopoly By Stephen K. Layson Department of Economics 457 Bryan Building, UNCG Greensboro, NC 27412 5001 USA (336) 334 4868 Fax (336) 334 5580 layson@uncg.edu ABSTRACT

More information

Product Quality, Reputation, and Market Structure

Product Quality, Reputation, and Market Structure Northwestern University From the SelectedWorks of Yuk-Fai Fong 2008 Product Quality, Reputation, and Market Structure James D Dana Yuk-Fai Fong, Northwestern University Available at: https://works.bepress.com/yuk_fai_fong/9/

More information

Bundling and Quality Assurance

Bundling and Quality Assurance Bundling and Quality Assurance James D. Dana Jr. Northeastern University Kathryn E. Spier Harvard University August 10, 2017 Abstract With imperfect private monitoring, a firm selling two experience goods

More information

Hidden Information and Self-Selection. Dr. Margaret Meyer Nuffield College

Hidden Information and Self-Selection. Dr. Margaret Meyer Nuffield College Hidden Information and Self-Selection Dr. Margaret Meyer Nuffield College 2015 Introduction In many transactions, one or more parties has private information about relevant characteristic. Examples (bilateral

More information

Midterm Review. B. How should the government intervene? - Often multiple options; to choose, need answer to know effects of policies.

Midterm Review. B. How should the government intervene? - Often multiple options; to choose, need answer to know effects of policies. 14.41 Public Economics Section Handout #5 Midterm Review I. Intro to Public Economics & Micro Review A. When should the government intervene? - Lesson of basic micro: the private market equilibrium is

More information

Econ Microeconomic Analysis and Policy

Econ Microeconomic Analysis and Policy ECON 500 Microeconomic Theory Econ 500 - Microeconomic Analysis and Policy Monopoly Monopoly A monopoly is a single firm that serves an entire market and faces the market demand curve for its output. Unlike

More information

Incentives in Supply Function Equilibrium

Incentives in Supply Function Equilibrium Discussion Paper No. 2014-38 September 29, 2014 http://www.economics-ejournal.org/economics/discussionpapers/2014-38 Please cite the corresponding Journal Article at http://www.economics-ejournal.org/economics/journalarticles/2015-5

More information

INTRODUCTORY ECONOMICS

INTRODUCTORY ECONOMICS 4265 FIRST PUBLIC EXAMINATION Preliminary Examination for Philosophy, Politics and Economics Preliminary Examination for Economics and Management Preliminary Examination for History and Economics INTRODUCTORY

More information

Product Differentiation and Innovation in Markets

Product Differentiation and Innovation in Markets S O L U T I O N S 26 Product Differentiation and Innovation in Markets Solutions for Microeconomics: An Intuitive Approach with Calculus (International Ed.) Apart from end-of-chapter exercises provided

More information