On the State Advertising Policy under Quality Information Bias

• Published date: 01 August 2013
• Author: Yasunori Ishii
• DOI: http://doi.org/10.1111/rode.12051
• Date: 01 August 2013

On the State Advertising Policy under Quality

Information Bias

Yasunori Ishii*

Abstract

This paper analyzes the effects of the state advertising policy of a developing country on the quality–price

competition between its firm and a developed country’s firm in an international duopoly. It considers the

quality information bias under which the product quality of the developing country’s firm is underestimated

and the state advertising policy that is implemented by the developing country in order to improve such

information bias at a national expense. We show that while a rise in the state advertising expense of the

developing country raises (reduces) the quality, price, and profit of the firm in the developing (developed)

country, it makes the firms’ quality–price competition more intense, and vice versa. We also find that the

developing country’s state advertising policy is an incomplete-bias-adjusting policy that does not com-

pletely eradicate the quality information bias of its firm.

1. Introduction

In the past three decades, a large number of new firms from developing countries

have attempted to enter international markets dominated by well-established firms

from developed countries, and some such firms have even survived in these highly

competitive markets. The rise in these new firms is one of reasons why several

developing countries, such as Brazil, Russia, India, and China, have achieved rapid

economic progress over these decades. Thus, the survival of firms from developing

countries in world markets has long been of great interest to their governments as

well as their firms. Therefore, while firms in the developing countries have chal-

lenged firms from the developed countries to fierce quality–price competition in

many international markets, their governments have implemented certain policies in

order to support these firms further. In this paper, we focus on this firms’ quality–

price battle and the state advertising policy of a developing country that has an

informational disadvantage.

The product quality offered by new entrants from developing countries is usually

inferior to that of incumbents from developed countries. In such a situation, new

entrants have competed against well-established incumbents on price. In practice,

even new firms whose product quality is inferior to that of existing firms can secure

their positions in international markets by supplying their goods at lower prices than

incumbents. Consequently, new entrants from developing countries coexist with exist-

ing firms from developed countries in many international markets. However, this

quality–price competition between new entrants and incumbent firms is not always

carried out under equal conditions.

* Ishii: Graduate School of Economics, Waseda University, 1-6-1 Nishi-Waseda, Shinjuku-ku, Tokyo 169-

805, Japan. Tel: +81-3-3204-8143; E-mail: yishii@waseda.jp. The author is indebted to Professors Hayne E.

Leland, Yu Yong, Bakar Normizan and an anonymous referee for their useful suggestions and comments.

Financial support from the Ministry of Education, Science and Culture in Japan is greatly acknowledged.

Review of Development Economics, 17(3), 571–584, 2013

DOI:10.1111/rode.12051

© 2013 John Wiley & Sons Ltd