Ignatius Horstmann and Glenn MacDonald
"Is advertising a signal of product quality? Evidence from the compact disc player market, 1983–1992"
Keywords: signaling, quality, pricing, advertising
Abstract: We study panel data on advertising and pricing in the compact disc player market during 1983–1992. Controlling for product features, firm heterogeneity, and aggregate effects, (i) advertising increases after the player is introduced, but at a decreasing rate; and (ii) price falls from the outset, and at an accelerating pace. These patterns are inconsistent with both the perfect learning in papers by Kihlstrom and Riordan [J. Polit. Econ. 92 (1984) 427]; and Milgrom and Roberts [J. Polit. Econ. 94 (1986) 796] and the imperfect learning in Horstmann and MacDonald [J. Econ. Manag. Strat. 3 (1994) 561] versions of paper by Nelson [J. Polit. Econ. 82 (1974) 729] model of advertising. Extensions having persistent consumer uncertainty and learning can explain these profiles.