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Why Market Shares Matter: An Information-Based Theory

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  • Ramon Caminal
  • Xavier Vives

Abstract

Consider a duopoly market in which consumers have heterogeneous information about the quality differential q of the two goods. When firms are ignorant about q, consumers rationally believe that a firm with high market shares is likely to produce a high-quality good. As a result, firms try to signal-jam the inferences of consumers and compete for market shares beyond the level explained by short-run profit maximization. When firms know q, multiple equilibria may exist, but there is always one equilibrium in which market shares signal quality, and then the market tends to be more competitive.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 27 (1996)
Issue (Month): 2 (Summer)
Pages: 221-239

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Handle: RePEc:rje:randje:v:27:y:1996:i:summer:p:221-239

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Cited by:
  1. Dirk Bergemann & Juuso Valimaki, 1997. "Market Diffusion with Two-Sided Learning," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 28(4), pages 773-795, Winter.
  2. Giuseppe Moscarini & Marco Ottaviani, 1998. "Price Competition for an Informed Buyer," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1199, Cowles Foundation for Research in Economics, Yale University.
  3. Gill, David & Sgroi, Daniel, 2012. "The optimal choice of pre-launch reviewer," Journal of Economic Theory, Elsevier, Elsevier, vol. 147(3), pages 1247-1260.
  4. Daher, Wassim & Mirman, Leonard J. & Santugini, Marc, 2012. "Information in Cournot: Signaling with incomplete control," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 30(4), pages 361-370.
  5. P. K. Monteiro & J. L. Moraga, 1998. "``We sold a million copies''-The role of advertising past sales," Industrial Organization, EconWPA 9812001, EconWPA.
  6. Hiroshi Kitamura & Akira Miyaoka & Misato Sato, 2011. "Free Entry, Market Diffusion, and Social Inefficiency with Endogenously Growing Demand," Discussion Papers in Economics and Business, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) 11-04-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Nov 2012.
  7. Kim, Hee-Su & Kwon, Namhoon, 2003. "The advantage of network size in acquiring new subscribers: a conditional logit analysis of the Korean mobile telephony market," Information Economics and Policy, Elsevier, Elsevier, vol. 15(1), pages 17-33, March.
  8. Ruiz-Aliseda, Francisco, 2009. "Misinformative advertising," IESE Research Papers, IESE Business School D/809, IESE Business School.
  9. Kitamura, Hiroshi & Miyaoka, Akira & Sato, Misato, 2013. "Free entry, market diffusion, and social inefficiency with endogenously growing demand," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 98-116.
  10. Henk Folmer & Auke Leen, 2013. "Why do successful restaurants not raise their prices?," Letters in Spatial and Resource Sciences, Springer, Springer, vol. 6(2), pages 81-90, July.
  11. Barrachina, Alex & Tauman, Yair & Urbano, Amparo, 2014. "Entry and espionage with noisy signals," Games and Economic Behavior, Elsevier, Elsevier, vol. 83(C), pages 127-146.
  12. Bose, Subir & Orosel, Gerhard O & Ottaviani, Marco & Vesterlund, Lise, 2005. "Dynamic Monopoly Pricing and Herding," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5003, C.E.P.R. Discussion Papers.
  13. Christian Volpe Martincus & Jerónimo Carballo, 2010. "Entering new country and product markets: does export promotion help?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 146(3), pages 437-467, September.
  14. Christian Volpe Martincus & Jerónimo Carballo, 2010. "Is Export Promotion Effective in Developing Countries? Firm-Level Evidence on the Intensive and Extensive Margins of Exports," IDB Publications 36763, Inter-American Development Bank.

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