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Imperfect competition and quality signalling

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Author Info
Andrew F. Daughety
Jennifer F. Reinganum

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Abstract

We examine the interplay of imperfect competition and incomplete information in the context of price competition among firms producing horizontally and vertically differentiated substitute products. Incomplete information about vertical quality (consumer satisfaction) signalled via price softens price competition. Low-quality firms always prefer the incomplete information game to the full-information analog. Moreover, for high-value markets with a sufficiently high proportion of high-quality firms, these firms also prefer incomplete information to full information. We find that an increase in the loss to consumers associated with the low-quality product may perversely benefit low-quality firms; we consider applications to tort reform and professional licensing. Copyright (c)2008, RAND.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.0741-6261.2008.00008.x
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Publisher Info
Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 39 (2008)
Issue (Month): 1 ()
Pages: 163-183
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Handle: RePEc:bla:randje:v:39:y:2008:i:1:p:163-183

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Andrew F. Daughety & Jennifer F. Reinganum, 1994. "Product Safety: Liability, R&D and Signaling," Game Theory and Information 9403007, EconWPA, revised 30 Mar 1994. [Downloadable!]
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  2. Mailath, George J., 1988. "An abstract two-period game with simultaneous signaling--Existence of separating equilibria," Journal of Economic Theory, Elsevier, vol. 46(2), pages 373-394, December. [Downloadable!] (restricted)
  3. Esther Gal-Or, 1988. "The Advantages of Imprecise Information," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 266-275, Summer. [Downloadable!] (restricted)
  4. Matthews, Steven A & Mirman, Leonard J, 1983. "Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand," Econometrica, Econometric Society, vol. 51(4), pages 981-96, July. [Downloadable!] (restricted)
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  5. Mark N. Hertzendorf & Per Baltzer Overgaard, 2001. "Price Competition and Advertising Signals: Signaling by Competing Senders," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 10(4), pages 621-662, December. [Downloadable!] (restricted)
  6. Nancy A. Lutz, 1989. "Warranties as Signals under Consumer Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 239-255, Summer. [Downloadable!] (restricted)
  7. Joseph E. Harrington Jr., 1987. "Oligopolistic Entry Deterrence under Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 211-231, Summer. [Downloadable!] (restricted)
  8. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  9. Andrew Daughety & Jennifer Reinganum, . "Secrecy and Safety," American Law & Economics Association Annual Meetings 1039, American Law & Economics Association. [Downloadable!]
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  10. Mailath, George J, 1989. "Simultaneous Signaling in an Oligopoly Model," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 417-27, May. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
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  12. Helmut Bester, 1998. "Quality Uncertainty Mitigates Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 828-844, Winter. [Downloadable!] (restricted)
  13. Mark N. Herzendorf & Per Baltzer Overgaard, 2001. "Prices as Signals of Quality in Duopoly," CIE Discussion Papers 2001-01, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
  14. Fluet, Claude & Garella, Paolo G., 2002. "Advertising and prices as signals of quality in a regime of price rivalry," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 907-930, September. [Downloadable!] (restricted)
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  15. Kyle Bagwell & Garey Ramey, 1991. "Oligopoly Limit Pricing," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 155-172, Summer. [Downloadable!] (restricted)
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  16. Bagwell, Kyle, 1992. "Pricing to Signal Product Line Quality," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(1), pages 151-74, Spring.
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  17. Martin, Stephen, 1995. "Oligopoly limit pricing: Strategic substitutes, strategic complements," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 41-65, March. [Downloadable!] (restricted)
  18. Das Varma, Gopal, 2003. "Bidding for a process innovation under alternative modes of competition," International Journal of Industrial Organization, Elsevier, vol. 21(1), pages 15-37, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rohan Pitchford & Mark L. J. Wright, 2008. "Holdouts In Sovereign Debt Restructuring: A Theory Of Negotiation In A Weak Contractual Environment," CAMA Working Papers 2008-37, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  2. Evangelos Mitrokostas & Emmanuel Petrakis, 2008. "Private CSR Activities in Oligopolistic Markets: Is there any room for Regulation?," Working Papers 0816, University of Crete, Department of Economics. [Downloadable!]
  3. Paolo Garella & Emmanuel Petrakis, 2008. "Minimum quality standards and consumers’ information," Economic Theory, Springer, vol. 36(2), pages 283-302, August. [Downloadable!] (restricted)
    Other versions:
  4. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Mass Torts and the Incentives for Suit, Settlement, and Trial," Working Papers 0713, Department of Economics, Vanderbilt University. [Downloadable!]
  5. Maarten C.W. Janssen & Santanu Roy, 2007. "Signaling Quality Through Prices in an Oligopoly," Departmental Working Papers 0709, Southern Methodist University, Department of Economics, revised Nov 2008. [Downloadable!]
    Other versions:
  6. Kamphorst, Jurjen J.A. & Van Velthoven, Ben C.J., 2006. "The introduction of an appeals court in Dutch tax litigation," MPRA Paper 2008, University Library of Munich, Germany, revised 27 Apr 2006. [Downloadable!]
    Other versions:
  7. Guiseppe Dari-Mattiacci & Bruno Deffains, 2006. "Uncertainty of Law and the Legal Process," Tinbergen Institute Discussion Papers 06-071/1, Tinbergen Institute. [Downloadable!]
  8. Eric Rasmusen, 2008. "Quality-Ensuring Profits," Working Papers 2008-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
  9. Che, Yeon-Koo & Spier, Kathryn, 2007. "Exploiting Plaintiffs Through Settlement: Divide and Conquer," MPRA Paper 6104, University Library of Munich, Germany. [Downloadable!]
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