This paper presents a signalling model in which high-quality firms underprice at the initial public offering (IPO) in order to obtain a higher price at a seasoned offering. The main assumptions are that low-quality firms must invest in imitation expenses to appear to be high-quality firms, and that with some probability this imitation is discovered between offerings. Underpricing by high-quality firms at the IPO can then add sufficient signalling costs to these imitation expenses to induce low-quality firms to reveal their quality voluntarily. The model is consistent with several documented empirical regnlarities and offers new testable implications. In addition, the paper provides empirical evidence that many firms raise substantial amounts of additional equity capital in the years after their IPO.

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: Recent interest in the Internet as a medium for commerce has raised questions about the usefulness of branding on the World Wide Web. In this paper we examine whether consumers use brands as sources of information when shopping on the Internet. Applying theory from the economics of information, we predict that recent adopters of the Internet will be less proficient at searching for product information and will rely more on brands. As they gather more experience on the Internet, their search proficiency should rise and their brand reliance should fall. These hypotheses are tested and confirmed using usage and opinion survey data from the Internet community. These results suggest that branding can facilitate consumers' acceptance of electronic commerce. KEYWORDS: electronic commerce, advertising, consumer search 1 INTRODUCTION Commerce on the Internet, or e-commerce, has experienced rapid growth during its infant years. The pace is not expected to slacken. Forrester Research estima...

I investigate how different sources of information influence the diffusion of pharmaceutical innovations. In prescription-drug markets, both advertising and scientific information stemming from clinical trials can affect physicians’ prescription choices. Using novel indices of clinical-research output, I find that both marketing and scientific evidence directly influence the diffusion process in the antiulcer-drug market, with marketing having a more pronounced influence. I also find evidence that clinical outputs are important drivers of firms’ marketing efforts, affecting sales indirectly. Taken together, the direct and indirect effects of science on demand imply strong private incentives for clinical research. I conclude that product-market competition in the pharmaceutical industry is shaped by both advertising rivalries and scientific rivalries. Moreover, drug advertising may perform an important informative function.

This chapter reviews the theoretical and empirical literature on the concept of credibility

In signalling environments ranging from consumption to education, high-quality senders often shun the standard signals that should separate them from lower-quality senders. We find that allowing for additional, noisy information on sender quality permits equilibria where medium types signal to separate themselves from low types, but high types then choose to not signal, or countersignal. High types not only save costs by relying on the additional information to stochastically separate them from low types, but countersignalling itself is a signal of confidence that separates high types from medium types. Experimental results confirm that subjects can learn to countersignal.

Every new method of trade offers an opportunity for economic agents to compare its costs and benefits relative to the status quo. Such comparison motivates sorting across market segments and reshapes the whole marketplace. The Internet provides an excellent example: it introduces substantial search cost savings over brick and mortar retail stores but imposes new obstacles for sellers to convey quality. Using sportscard trading as a case study, we provide empirical evidence on (1) the sorting of product quality between the online and offline segments, (2) the changes for retail outlets after the Internet came into place, and (3) how supporting industries such as professional grading and card manufacturing adapted to take advantage of the new market.

An important question that Þrms face in advertising is developing effective media strategy. Given the fragmentation of media (broadcast TV for example) and a multitude of new advertising media (the Internet, satellite shopping channels, and infomercials), Þrms have the ability to target advertising to speciÞc segments of consumers in a market. This paper examines advertising strategy with a model that allows for the targeting of advertising to different groups of consumers in a market with competing Þrms. When Þrms can target advertising to speciÞc segments in the market, we Þnd that they choose to advertise more to consumers that have a strong preference for their product than to comparison shoppers who are likely to be attracted away to competing products. Advertising less to comparison shoppers who shop across products can be seen as a way for Þrms to endogenously create additional differentiation in the market. In addition, targeting makes advertising more effective by eliminating “wasted ” advertising to consumers who would not buy their product. Therefore the targeting of advertising increases equilibrium proÞts. Targeting can lead to lower advertising expenditures by reducing the wastage created by sending advertising to consumers who are unlikely to buy. But, interestingly, targeting can also lead Þrms to an increase in advertising spending. When

Context can influence decisions. This malleability of choice is usually invoked as evidence that people do not maximize stable preference orderings. In a market equilibrium, however, context conveys payoff-relevant information to consumers. Consequently, these consumers rationally violate naïve formulations of standard choice theoretic principles. I identify informational asymmetries under which apparently anomalous behaviors, namely the compromise effect and choice overload, arise as market equilibria. Firms respond to consumers’ contextual inference; in case of the compromise effect, a firm may introduce premium loss leaders (expensive goods of overly high quality that increase the demand for other goods). (JEL D11, D83, M31) Numerous studies demonstrate that seemingly irrelevant factors influence people’s decisions. Perhaps the best known examples of such influence are context effects. A consumer exhibits a context effect if her choice between two alternatives systematically depends on the presence of other options. An extensive literature demonstrates context effects in laboratory settings. One of the most widely studied context effects is the compromise effect (Itamar Simonson 1989), 1 which refers to the finding that people tend to choose the middle option. More precisely, when three alternatives are available, the middle alternative is chosen more often than when it is paired with only one other option. Figure 1 shows the compromise effect obtained by Simonson (1989). This tendency to avoid extreme options has been credited with affecting decisions ranging from the demand for wine (Daniel L. McFadden 1999) to voting (Kaisa Herne 1997) and investing (Shlomo Benartzi and Richard H. Thaler 2002). Even more telling of the importance bestowed on the compromise effect is its didactic use in books such as 101 Ways to Increase Sales (Dirk

This paper models the incentives created by career concerns for opinion-producing agents. We find that career concerns can create an incentive for exaggeration or anti-herding, since high-ability agents will have opinions that are more different from the consensus on average and potential clients will learn more quickly about how different an agent's opinions are from the consensus on average that about whether or not they are exaggerating. The model predicts that agents should exaggerate more when they are under-rated by their clients, when the realizations of the variables they are forecasting are expected to be especially noisy, and when they expect to make fewer future forecasts. We find that these predictions are consistent with the empirical data on equity analyst's earnings forecasts.