Signaling quality through prices in an oligopoly
AbstractFirms signal quality through prices even if the market structure is very competitive and price competition is severe. In a symmetric Bertrand oligopoly where products may differ only in their quality and each firm's product quality is private information (unknown to consumers and to other firms), there exist symmetric fully revealing perfect Bayesian equilibria where low quality firms randomize over an interval of prices and high quality firms charge high prices. Signaling requires that the market power and rent of low quality firms be large enough and often this requires that high quality firms exercise sufficient market power. There is a unique symmetric fully revealing equilibrium satisfying the D1 criterion; in this equilibrium too, both low and high quality firms may exhibit considerable market power. Market power of high quality firms may persist even as the number of firms becomes arbitrarily large. Every D1 equilibrium involves some revelation of information.
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Bibliographic InfoArticle provided by Elsevier in its journal Games and Economic Behavior.
Volume (Year): 68 (2010)
Issue (Month): 1 (January)
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Web page: http://www.elsevier.com/locate/inca/622836
Signaling Quality Oligopoly Incomplete information;
Other versions of this item:
- Maarten C.W. Janssen & Santanu Roy, 2007. "Signaling Quality through Prices in an Oligopoly," Tinbergen Institute Discussion Papers 07-081/1, Tinbergen Institute.
- 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.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
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