An empirical examination of advertising as a signal of product quality

Abstract

Using data from the U.S. automobile industry we test for evidence consistent with game-theoretic models of advertising and quality signalling. We find that manufacturers use both price and advertising to signal the quality of their products; when price exceeds the full information case, manufacturers use above average levels of advertising. We also find a positive association between higher future sales and current advertising levels for automobile models. These results are consistent with game-theoretic signalling models and reported management practices.