Signaling advertising by multiproduct firms |
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Authors: | Cesaltina Pacheco Pires Margarida Catalão-Lopes |
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Institution: | (1) Department of Economics, Kyung Hee University, 1 Hoegidong, Dongdaemunku, Seoul, 130-701, Korea |
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Abstract: | We consider the use of advertising expenses as quality signals in multiproduct firms, extending previous results on single
product firms. In our model, a firm introduces sequentially two products whose qualities are positively correlated. We investigate
whether there exist information spillovers from the first to the second market. We show that, when correlation is high, the
equilibrium in market 2 depends on the quality reputation the firm has gained in market 1. Moreover, if a firm with a high-quality
product 1 wants to separate from its low-quality counterpart, it needs to advertise more in this market than if the qualities
of the two products are unrelated. This advertising level signals not only high quality in the first market, but also the
likely quality of the second product. Thus, advertising in the first market has information spillovers in the second market. |
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