| Abstract: | This paper investigates the interaction between consumer learning and advertising using a simulation model. Consumers use advertising to estimate the quality change, but learn advertising's trustworthiness through their consumption experience. Firms spend on not only advertising but also R&D to improve its product quality, following satisficing principles. We found that, if consumer learning is slow, an advertising-intensive firm captures most of the market in the long run despite its low product quality; in this sense, advertising misleads consumers. When learning is fast or when consumers do not rely on advertising at all, advertising is unlikely to mislead them. Easy imitation of rival products also prevents advertising from being misleading. These results are consistent with existing empirical findings on advertising-quality relationships. |
