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