Understanding the Welfare-Enhancing Roles of Advertising in Markets

Economists credit ads with two welfare-enhancing roles: Informative – trimming search costs (Stigler 1961) and Signaling – high-quality sellers are more willing to incur large ad costs expecting future sales (Nelson 1974).

Milgrom and Roberts formalize the idea that ad spend, costly and more valuable to better firms, can serve as a credible signal of quality.

The Rise of the Grifter Equilibrium

Economists credit ads with two welfare-enhancing roles: Informative – trimming search costs (Stigler 1961) and Signaling – high-quality sellers are more willing to incur large ad costs expecting future sales (Nelson 1974).