On the State Advertising Policy under Quality Information Bias

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 completely eradicate the quality information bias of its firm.