How can signalling theory explain the advertising strategies of a firm that produces a good quality product
A)It is not a good example of asymmetric information.
B)It has more to gain by signalling (advertising) than does a firm with an inferior product.
C)It will never signal (advertise), regardless of the cost of the signal.
D)It will signal (advertise) only if the cost of the signal is very low.

Question

Quizplus · Accepted Answer

Signalling theory suggests that a firm with a good quality product has an incentive to advertise in order to signal its quality to potential buyers. This is because there is asymmetric information between the firm and the buyer, and the buyer cannot determine the quality of the product without some additional information (i.e. the signal provided by the firm's advertising). In contrast, a firm with an inferior product has little to gain by advertising, as the signal provided by the advertising may actually reveal the low quality of its product. Therefore, choice B is the best explanation.

How Can Signalling Theory Explain the Advertising Strategies of a Firm