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Many advertisements, for example on TV, contain descriptions about quality aspects of a good. This is especially true for advertisements of manufacturing firms which (also) indirectly sell through retailers. A priori, it is not clear how valuable this information is for consumers.

In contrast to much of the existing literature, interpreting the target of informative advertising to be horizontal, that is attracting consumers from competing firms, a different explanation is presented here.

A simple model of vertical relations, where consumers differ in their valuation of quality, is presented. It is shown that a monopolistic manufacturer can use advertising to transmit private information about the quality of his good to consumers, thereby influencing the incentives of a (monopolistic) retailer and reducing the severity of the well-known double marginalization problem. The cases of experience goods and search goods are distinguished and it is shown that information transmission is especially effective if consumers find it difficult to determine the quality of the good in question

The recommendation effect introduces a new rationale for product differentiation other than the usual motivation to reduce price competition.

We introduce consumer learning in a version of Hotelling's model with sequential consumer purchases and a second dimension of variation, quality, about which the consumers have differential information.

Firms are confronted with two offsetting effects: differentiation decreases the likelihood that a product is bought in earlier periods, but, by making inference more valuable, it also increases the likelihood that later consumers buy the differentiated good. In some equilibria firms differentiate and transparency enhancing policies may be welfare decreasing.

We combine two extensions of the differentiated duopoly model of Dixit (1979) to analyze the effect of consumer learning on firms' incentives to differentiate their products in models of Cournot and Bertrand competition.

Products are of different quality, consumers buy sequentially and are imperfectly informed about the quality of the goods. Before simultaneously competing in quantities, firms simultaneously choose their investment into differentiation. Late consumers can observe earlier consumers' decisions and extract information about the quality of the goods. This possibility influences the firms' incentives to differentiate. If firms compete in quantities, they are more likely to invest in differentiation with consumer learning than without. We also examine the case in which firms compete in prices. Here, the effect of consumer learning is reversed, so that differentiation is less likely with consumer learning. Consumer learning thus increases the competition in the Bertrand setting and weakens it in the Cournot model.