Advertising and prices as signals of quality in a regime of price rivalry

This paper addresses the issue of whether firms use price or advertising to signal quality and whether advertising has pro- or anti-competitive effects. We show that, when there is price rivalry, advertising may be necessary to signal quality, in contrast to single-firm, models. Signaling through price alone prevails for sufficient inter-brand quality differentials; joint price-advertising signals prevail when the quality differential is small. Finally, advertising in the form of variable rather than fixed costs is shown to increase the feasibility of signaling quality. (C) 2002 Elsevier Science B.V. All rights reserved.