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Imperfect competition and quality signalling

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  • Andrew F. Daughety
  • Jennifer F. Reinganum

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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Bibliographic 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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  1. Mark N. Hertzendorf & Per Baltzer Overgaard, 2001. "Price Competition and Advertising Signals: Signaling by Competing Senders," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(4), pages 621-662, December.
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  19. Dan Levin & James Peck & Lixin Ye, 2009. "QUALITY DISCLOSURE AND COMPETITION -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 57(1), pages 167-196, 03.
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