ABC Company knows that it produces and sells a very good mouse trap.XYZ Company knows that it produces and sells a lousy mouse trap.According to the signaling theory of advertising,

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According to the signaling theory of advertising, firms with higher-quality products have an incentive to spend more on advertising to signal their quality to consumers. Therefore, ABC has an incentive to spend a large amount of money on advertising its good mouse trap. However, XYZ, with its lousy mouse trap, does not have an incentive to spend a large amount of money on advertising as it may signal to consumers that the product is of higher quality than it is. Instead, XYZ may focus on improving the quality of its product.

ABC Company Knows That It Produces and Sells a Very