Price Advertising and the Deterioration of Product Quality

Abstract

Arguments in favor of self-enforced bans on advertising by professionals often rely on the stylized fact that advert ising can communicate about price but not about quality. This being t he case, it is argued that allowing professionals to advertise runs t he risk that firms will compete vigorously over price at the expense of the quality of their product. This paper shows that even if price can communicate no information directly about quality, it can do so i ndirectly because price will be a signal of quality. Because of this, allowing advertising is shown to improve consumer welfare. Copyright 1988 by The Review of Economic Studies Limited.