Dissipative advertising signals quality: Static model with a continuum of types

Advertising and price have been shown to signal product quality. Most works limit the number of types to high and low quality. I characterize the optimal separating marketing strategy when both quality and marginal cost are uncertain and continuous variables.

► Exploration of signaling game with a bi-dimensional continuum of types (quality and marginal cost). ► Despite the large type set, a unique separating equilibrium is derived (using elimination of dominated strategies). ► Contrary to the two-type model, price alone is not enough for separation. Dissipative advertising (burning money) is necessary. ► Dissipative advertising emerges in a static framework (no repeat purchases).