Price and advertising as signals of quality when some consumers are informed

A monopoly produces a good of either high or low quality. Some consumers are informed about quality while others are uninformed and infer quality through the firm's marketing strategy. The model is an extension of Bagwell and Riordan [American Economic Review 81(1) (1991) 224]. Dissipative advertising (combined with a high price) is an efficient signal of quality when the marginal cost of production of high quality is low. If the proportion of informed consumers is low, quality is signaled only through a high price. However, if this proportion is intermediate, quality is signaled by both advertising and price.