Advertising, quality, and willingness-to-pay: Experimental examination of signaling theory

According to the quality signaling theory, firms are motivated to invest more advertising in high-quality products. This paper conducts an experiment through a closed-ended double-bounded dichotomous choice of the contingent valuation method to measure consumer willingness-to-pay for a fictitious cell phone market of varying quality before and after advertising. The results show that advertising effectively influences consumer awareness of perceived quality and enhance their WTP. The results also suggest that even though the high- and low-quality products differ in the investment of advertising, the effect of advertising on the increase in consumer WTP for low-quality products as well as for high-quality products.

► This study analyzes the change in the consumers’ WTP before and after advertising.
► The contingent valuation method is the analysis method.
► Advertising effectively influence the consumers’ awareness of product quality.
► The effect of advertising on the increase in consumer WTP for low-quality products as well as for high-quality products.