IDEAS home Printed from https://ideas.repec.org/a/bpj/bejtec/v20y2020i1p28n14.html
   My bibliography  Save this article

Pricing, Signalling, and Sorting with Frictions

Author

Listed:
  • Godenhielm Mats

    (Department of Political and Economic Studies, University of Helsinki, P.O. Box 17, FI-00014, Helsinki, Finland)

  • Kultti Klaus

    (Department of Economic and Economic Studies, University of Helsinki, P.O. Box 17, FI-00014, Helsinki, Finland)

  • Virkola Tuomo

    (European University Institute, I-50014 San Domenico di Fiesole (FI), Toscana, Italy)

Abstract

We analyse signalling and sorting in a market with frictions and private information. Buyers are heterogeneous, the sellers choose what quality to produce and post prices. Buyers do not observe quality, but infer it from prices. In equilibrium high-quality sellers signal quality with a price that is higher than under perfect information. Compared to the outcome under perfect information the higher price has two effects. First, it makes production of high-quality goods more attractive increasing its supply. Second, it makes high-valuation buyers worse-off, directing part of them to low-quality sellers. We determine which effect dominates; whether too many or too few sellers produce high quality. We also show that the prices of both high- and low-quality goods are higher, and the sellers do better and the buyers worse under private information. In addition, we show that an increase in the production cost of high quality may lead to higher profits and prices.

Suggested Citation

  • Godenhielm Mats & Kultti Klaus & Virkola Tuomo, 2020. "Pricing, Signalling, and Sorting with Frictions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 20(1), pages 1-28, January.
    • Handle: RePEc:bpj:bejtec:v:20:y:2020:i:1:p:28:n:14
    DOI: 10.1515/bejte-2018-0108
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/bejte-2018-0108
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/bejte-2018-0108?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Heterogeneous buyers; endogenous types; signalling; sorting; directedsearch;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejtec:v:20:y:2020:i:1:p:28:n:14. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.