Does Advertising Signal Product Quality? Evidence from the Market for Compact Disc Players
Year: 1997
Type: preprint
Abstract: This paper explores panel data on advertising and product pricing for firms in the compact disc player market over the period 1983-92. The data reveal that, for the typical CD player, advertising and price move together, with both rising initially and remaining above introductory levels for approximately five years after a player is introduced, and falling below subsequently. Coordination between advertising and pricing is apparent. A positive association between price and advertising is strongly inconsistent with formalizations of Nelson's (1974) advertising signaling model. The imperfect consumer learning model developed by Horstmann and MacDonald (1994) implies a positive association but does not predict the decline to below-introductory levels. An extension of the imperfect learning model can explain this observation, as can a model in which advertising is innately informative and firms learn better technologies over time. While these extensions are consistent with the observed similarity between the time paths of price and advertising, neither demands it.
Source: SSRN Electronic Journal
Authors: Ignatius J. Horstmann, Glenn MacDonald
Institutions: University of Toronto, Washington University in St. Louis
Language: English
Subfield: Marketing
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W316489122