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The Effect of advertising on price and quality: an empirical study of eye examinations, sweet lemons and self-deceivers

Author: Parker, Philip M. INSEAD Area: Marketing Series: Working Paper ; 91/45/MKT Publisher: Fontainebleau : INSEAD, 1991.Language: EnglishDescription: 25 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: Theoretical research on the economics of information has long debated whether advertising competition fosters high quality, low-priced products or low-quality, higher-priced rip-offs. This debate, and subsequent empirical studies, have had an impact on policy-making and the deregulation of advertising and marketing activities, especially for professional service industries. This paper's empirical evidence suggests that, under certain conditions, information asymmetry can lead to low-quality advertised firms competing against, and gaining market shares from, high-quality non-advertised firms. Such a "lemons" process might also occur with advertised products ultimately selling at higher prices (adjusted for quality) than non-advertisers. The findings support the theory that information asymmetry, coupled with advertising and product bundling strategies, can lead to market failure, particularly in markets where self-deceiving consumers end up being satisfied with low-quality products at high-quality prices
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Theoretical research on the economics of information has long debated whether advertising competition fosters high quality, low-priced products or low-quality, higher-priced rip-offs. This debate, and subsequent empirical studies, have had an impact on policy-making and the deregulation of advertising and marketing activities, especially for professional service industries. This paper's empirical evidence suggests that, under certain conditions, information asymmetry can lead to low-quality advertised firms competing against, and gaining market shares from, high-quality non-advertised firms. Such a "lemons" process might also occur with advertised products ultimately selling at higher prices (adjusted for quality) than non-advertisers. The findings support the theory that information asymmetry, coupled with advertising and product bundling strategies, can lead to market failure, particularly in markets where self-deceiving consumers end up being satisfied with low-quality products at high-quality prices

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