Advertising, Consumer Information, and Product Quality
Volume: Volume 10, No. 2
Issue: Autumn 1979
Pages: pp. 566-588
Authors: Yehuda Kotowitz and Frank Mathewson
Title: Advertising, Consumer Information, and Product Quality
Abstract: This article analyzes a monopolist's quality and advertising policies and evaluates their social optimality. Our model considers a rational, though not fully informed, consumer who holds prior perceptions about aspects of quality, which determine his purchase pattern. These quality perceptions constitute the product's goodwill. Differences between expected and experienced quality lead to reevaluation of expectations. Monopolists affect these perceptions, and hence build up goodwill, by advertising and quality attribute variations. These affect consumer welfare directly and indirectly by their informational content. We find that advertising may profitably mislead, at least in the short run. Although the welfare effects of a monopolist's quality and advertising policies are not generally determinate, even when information is untrue, we are able to evaluate the welfare determinants of advertising policy from an objective standard and to specify some of the conditions under which advertising is socially excessive.
JEL Classification
Microeconomics Theory of Production (0223)
Microeconomics Theory of Firm and Industry under Imperfectly Competitive Market Structures (0226)
Marketing and Advertising (5310)