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Pricing to Signal Product Line Quality

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  • Bagwell, Kyle

Abstract

This paper offers a general characterization of the optimal product line prices for a monopolist whose quality of products is initially unknown to consumers. In the focal equilibrium, a monopolist signals a high-quality product line by pricing as if quality were known to be high, but costs of production were higher than they truly are. In a rich set of environments, this characterization implies that the prices of all products are initially distorted upward, with the price distortion being largest for products with the most inelastic demands and/or quality-sensitive production costs. These implications yield predictions for the time path of prices that are broadly consistent with evidence from the marketing literature. The multidimensional signaling problem is made tractable by the satisfaction of a very simple and powerful single crossing property. Copyright 1992 by MIT Press.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 1 (1992)
Issue (Month): 1 (Spring)
Pages: 151-74

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Handle: RePEc:bla:jemstr:v:1:y:1992:i:1:p:151-74

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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References

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  1. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Gerard J. Tellis & Birger Wernerfelt, 1987. "Competitive Price and Quality Under Asymmetric Information," Marketing Science, INFORMS, vol. 6(3), pages 240-253.
  3. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  4. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  5. Kyle Bagwell, 1990. "Optimal Export Policy for a New-Product Monopoly," Discussion Papers 898, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Kyle Bagwell & Garey Ramey, 1988. "Advertising and Limit Pricing," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 59-71, Spring.
  7. Bagwell, Kyle & Ramey, Garey, 1990. "Advertising and pricing to deter or accommodate entry when demand is unknown," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 93-113.
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Citations

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Cited by:
  1. Andrew F. Daughety & Jennifer F. Reinganum, 2006. "Products Liability, Signaling and Disclosure," Vanderbilt University Department of Economics Working Papers 0625, Vanderbilt University Department of Economics.
  2. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Communicating Quality: A Unified Model of Disclosure and Signaling," Vanderbilt University Department of Economics Working Papers 0703, Vanderbilt University Department of Economics.
  3. Marc Auboin & Michele Ruta, 2012. "The Relationship between Exchange Rates and International Trade: A Literature Review," CESifo Working Paper Series 3868, CESifo Group Munich.
  4. Andrew F. Daughety & Jennifer F. Reinganum, 2005. "Imperfect Competition and Quality Signaling," Vanderbilt University Department of Economics Working Papers 0520, Vanderbilt University Department of Economics.
  5. Cesaltina Pacheco Pires & Margarida Catalão-Lopes, 2011. "Signaling advertising by multiproduct firms," International Journal of Game Theory, Springer, vol. 40(2), pages 403-425, May.
  6. Maarten C.W. Janssen & Santanu Roy, 2007. "Signaling Quality through Prices in an Oligopoly," Tinbergen Institute Discussion Papers 07-081/1, Tinbergen Institute.
  7. Andrew Daughety & Jennifer Reinganum, . "Secrecy and Safety," American Law & Economics Association Annual Meetings 1039, American Law & Economics Association.
  8. Menzler-Hokkanen, Ingeborg & Langhammer, Rolf J., 1994. "Product and country substitution in imports : an empirical comparison of theoretical concepts," Open Access Publications from Kiel Institute for the World Economy 1599, Kiel Institute for the World Economy (IfW).
  9. Andrew F. Daughety & Jennifer F. Reinganum, 2004. "Competition and Confidentiality: Signaling Quality in a Duopoly when there is Universal Private Information," Vanderbilt University Department of Economics Working Papers 0417, Vanderbilt University Department of Economics.
  10. Menzler-Hokkanen, Ingeborg & Spinanger, Dean, 1993. "On the quality of quality measures in international trade," Kiel Working Papers 587, Kiel Institute for the World Economy.
  11. Clements, Matthew T., 2011. "Low quality as a signal of high quality," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 5(5), pages 1-22.
  12. Maarten C.W. Janssen & Santanu Roy, 2007. "Signaling Quality through Prices in an Oligopoly," Tinbergen Institute Discussion Papers 07-081/1, Tinbergen Institute.
  13. Thomas, Louis & Shane, Scott & Weigelt, Keith, 1998. "An empirical examination of advertising as a signal of product quality," Journal of Economic Behavior & Organization, Elsevier, vol. 37(4), pages 415-430, December.

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