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Quantitative Marketing and Economics

, Volume 14, Issue 3, pp 233–269 | Cite as

Consumer deliberation and quality signaling

  • Liang Guo
  • Yue Wu
Article
  • 563 Downloads

Abstract

Consumers are often uncertain about their product valuation before purchase. They may bear the uncertainty and purchase the product without deliberation. Alternatively, consumers can incur a deliberation cost to find out their true valuation and then make their purchase decision. This paper proposes that consumer deliberation about product valuation can be an endogenous mechanism to enable credible quality signaling. We demonstrate this point in a simple setup in which product quality influences the probability that the product has high valuation. We show that with endogenous deliberation there may exist a unique separating equilibrium in which the high-quality firm induces consumer deliberation by setting a high price whereas the low-quality firm prevents deliberation by charging a low price. Compared to the case of complete information, the price of the high-quality firm can be distorted upward to facilitate consumer deliberation, or distorted downward to avoid the low-quality firm’s imitation. In an extension we show that dissipative advertising can facilitate quality signaling. The high-quality firm can utilize advertising spending to avert imitation from the low-quality firm without distorting price downward, earning a higher profit than that without advertising. However, advertising mitigates the distortion at the expense of consumer surplus and social welfare.

Keywords

Deliberation Signaling Dissipative advertising 

JEL Classification

D82 D83 L15 M3 

Notes

Acknowledgments

The authors thank Dmitri Kuksov, Paulo Albuquerque, Sameer Hasija, V. Padmanabhan, Kaifu Zhang, and attendees of 2015 Marketing Science Conference for their valuable comments.

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.CUHK Business SchoolChinese University of Hong KongShatinChina
  2. 2.Katz Graduate School of BusinessUniversity of PittsburghPittsburghUSA

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