Signaling Product Quality by Price

Shane Parendo, Cheng-Zhong Qin

PDF(336 KB)
PDF(336 KB)
Front. Econ. China ›› 2012, Vol. 7 ›› Issue (3) : 363-372. DOI: 10.3868/s060-001-012-0016-1
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Signaling Product Quality by Price

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Abstract

This paper analyzes the role of price as a signal of the quality of a monopoly firm's new product. The quality of the goods is drawn from a continuum and is unknown to consumers. We establish a unique separating equilibrium using equilibrium characterization results for signaling games. The equilibrium price monotonically increases with quality levels and exceeds the complete-information monopoly price for all quality levels but the lowest one. However, the upward distortion decreases as the proportion of pre-informed consumers increases. These results extend both the signaling role of price and characteristics of the separating equilibrium as established in Bagwell and Riordan (1991).

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separating equilibrium / price distortion / signaling game

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Shane Parendo, Cheng-Zhong Qin. Signaling Product Quality by Price. Front Econ Chin, 2012, 7(3): 363‒372 https://doi.org/10.3868/s060-001-012-0016-1

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