All Signals are not Created Equal: Managers’ Choice of Signal Under Information Asymmetry in Competitive Markets

Purpose – Although some literature exists on how consumers may interpret firm-generated signals about the unobservable quality of their product, there has been little effort to examine whether and how managers deploy signals about unobservable quality to compete.Design/methodology/approach – In this chapter, we address this issue by examining whether managers consciously use signals to compete with other firms, and how they choose between the vast number of signals available to them. We develop a formal model that allows us to generate a set of predictions drawn from information economics and behavioral decision theory. The predictions specify a pattern of managerial behavior according to which signals belonging to some categories are relatively attractive (for economic as well as psychological reasons).Findings – We report on the results of a series of three experiments in which executives are given the opportunity to deploy signals to communicate unobservable quality to skeptical consumers in a competitive market.Value/originality – The results of the studies provide compelling evidence in support of the formal argument.