Endogenous Market Thickness, Prices and Honesty: Quality Demand Traps
AbstractWe study the interaction between product quality, prices and demand in a dynamic model of asymmetric information. Sellers choose between producing high quality goods which gives low profits today but increases probability of future survival in the market and low quality ones which gives higher returns today but lowers future survival. However, demand depends on expected quality. Multiple steady states (high demand high quality, low demand low quality) exist if the present discounted value of lifetime profits from selling high quality goods exceeds a certain cutoff. We also characterise the equilibrium price which depends on the distribution of buyer valuations.
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Bibliographic InfoPaper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 05-02.
Length: 31 pages
Date of creation: Jan 2005
Date of revision:
market thickness; endogenous quality; multiple equilibria; price mechanism;
Find related papers by JEL classification:
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
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