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Signaling Product Quality by Price

Author

Listed:
  • Shane Parendo

    (Department of Economics, University of California, Santa Barbara, CA 93106, USA)

  • Cheng-Zhong Qin

    (Department of Economics, University of California, Santa Barbara, CA 93106, USA)

Abstract

This paper analyzes the role of price as a signal of the quality of a monopoly firm's new product. The quality of the goods is drawn from a continuum and is unknown to consumers. We establish a unique separating equilibrium using equilibrium characterization results for signaling games. The equilibrium price monotonically increases with quality levels and exceeds the complete-information monopoly price for all quality levels but the lowest one. However, the upward distortion decreases as the proportion of pre-informed consumers increases. These results extend both the signaling role of price and characteristics of the separating equilibrium as established in Bagwell and Riordan (1991).

Suggested Citation

  • Shane Parendo & Cheng-Zhong Qin, 2012. "Signaling Product Quality by Price," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 7(3), pages 363-372, September.
    • Handle: RePEc:fec:journl:v:7:y:2012:i:3:p:363-372
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-001-012-0016-1
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    More about this item

    Keywords

    separating equilibrium; price distortion; signaling game;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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