Ignatius J. Horstmann and Glenn M. MacDonald

When Is Advertising a Signal of Product Quality?

A model of advertising is presented in which consumption experience is an imperfect indicator of product quality. In equilibrium, neither price nor advertising signal the quality of newly introduced goods. Advertising of established products can be a signal of quality, but if it is, it must be an imperfect signal leaving residual uncertainty that influences consumers’ repurchase decision. A set of observable implications follow.