Signaling advertising by multiproduct firms

We consider the use of advertising expenses as quality signals in multiproduct firms, extending previous results on single product firms. In our model a firm introduces sequentially two products whose qualities are positively correlated. We investigate whether there exist information spillovers from the first to the second market. We show that, when correlation is high, the equilibrium in market 2 depends on the «quality reputation» the firm has gained in market 1. Moreover, a firm with a high-quality product 1 may need to advertise a very high amount in this market in order to separate from her low-quality counterpart. By advertising such high amount, the firm is also signalling the quality of the product that she will introduce in the future. Thus advertising in the first market has information spillovers in the second market.