An empirical examination of advertising as a signal of product quality

Using data from the U.S, automobile industry we test for evidence consisten t 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, manufacturer s use above average levels of advertising. We also find a positive associat ion between higher future sales and current advertising levels for automobi le models. These results are consistent with game-theoretic signalling mode ls and reported management practices. (C) 1998 Elsevier Science B.V. All ri ghts reserved.