An analytical model of the relationship between product quality and advertising
Résumé
The existing literature debates if the products of better quality are more heavily advertised. This article resolves this contradiction by answering the question of when better quality leads to more advertising. It provides a novel articulation of prior empirical research, modeling the advertising-quality relationship in an optimal control setting. On the supply-side, a firm carries out advertising to promote its product and product innovation policies that improves product quality. On the demand-side, consumers are sensitive to product price, product quality, and advertising expenditure. The paper identifies the conditions that will dictate when the advertising-quality relationship will be positive or negative. The argument is that advertising increases with quality (i.e., positive relationships) if the demand effects (quality and advertising effects on demand) outweigh the supply effect (quality effect on cost). Alternatively, advertising decreases with quality (i.e., negative relationships) if the demand effects are lower than the supply effect. Consequently, despite consumer awareness of quality, a firm may advertise a product of lower quality more to maximize profit.