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Competition and the signaling role of prices

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  • LG. Deidda
  • F. Adriani

Abstract

In a market where sellers are heterogeneous with respect of the quality of their good and are more informed than buyers, high quality sellers’ chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competi- tion among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.

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Bibliographic Info

Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 201012.

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Date of creation: 2010
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Handle: RePEc:cns:cnscwp:201012

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Keywords: signaling; price- setting; price dispersion; market for lemons; competition; adverse selection;

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Cited by:
  1. LG. Deidda & F. Adriani, 2010. "Competition and the signaling role of prices," Working Paper CRENoS 201012, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  2. Dakshina De Silva & Caroline Elliott & Robert Simmons, 2013. "Restaurant wars," Working Papers, Lancaster University Management School, Economics Department 44312700, Lancaster University Management School, Economics Department.

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