This study investigates two main issues: the relationship between advertising expenditure and service quality, and the relationship between price and service quality in the hotel industry. The authors consider an asymmetric-information environment, in which consumers are uncertain about service quality, and address the above issues from a signalling perspective. Building on signalling and counter-signalling theory in economics, the authors propose a number of testable hypotheses and conduct an empirical study using data for Taiwanese international tourist hotels. The empirical results support the hypothesis that the advertising–quality relationship is inverted-U shaped, whereas the price–quality relationship is positive and monotonic. Hence, higher prices may signal higher service quality, whereas higher advertising expenditure does not necessarily signal higher service quality.
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