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Signaling Quality through Prices in an Oligopoly

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  • Maarten C.W. Janssen

    ()
    (Erasmus University Rotterdam)

  • Santanu Roy

    ()
    (Southern Methodist University, Dallas, Texas)

Abstract

Firms signal high quality through high prices even if the market structure is highly competitive and price competition is severe. In a symmetric Bertrand oligopoly where products may differ only in their quality, production cost is increasing in quality and the quality of each firm’s product is private information (not known to consumers or to other firms), we show that there exist fully revealing equilibria in mixed strategies. In such equilibria, low quality firms enjoy market power when other firms are of high quality. High quality firms charge higher prices than low quality firms but lose business to rival firms with higher probability. Some of the revealing equilibria involve high degree of market power (price close to full information monopoly level) while others are more “competitive”. Under certain conditions, if the number of firms is large enough, information is revealed in every equilibrium.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-081/1.

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Date of creation: 22 Oct 2007
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Handle: RePEc:dgr:uvatin:20070081

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Keywords: Signaling; Quality; Oligopoly; Incomplete Information;

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References

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Citations

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Cited by:
  1. Bester, Helmut & Demuth, Juri, 2011. "Signalling rivalry and quality uncertainty in a duopoly," Discussion Papers 2011/20, Free University Berlin, School of Business & Economics.
  2. Garcia, Daniel, 2014. "Branding and Collusion in Vertically Differentiated Industries," MPRA Paper 54010, University Library of Munich, Germany.
  3. Leonard J. Mirman & Marc Santugini, 2008. "The Informational Role of Prices," Cahiers de recherche 08-09, HEC Montréal, Institut d'économie appliquée, revised Apr 2014.
  4. Bontems, Philippe & Mahenc, Philippe, 2014. "Signaling quality in vertical relationships," IDEI Working Papers 819, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Leonard J. Mirman & Egas Salgueiro & Marc Santugini, 2011. "Noisy Signaling in Monopoly," Cahiers de recherche 11-03, HEC Montréal, Institut d'économie appliquée, revised May 2013.
  6. Wassim DAHER & Leonard J. MIRMAN & Marc Santugini, 2009. "Information in Cournot: Signaling with Incomplete Control," Cahiers de recherche 09-09, HEC Montréal, Institut d'économie appliquée, revised Nov 2011.
  7. Buehler, B. & Schuett, F., 2012. "Certification and Minimum Quality Standards when Some Consumers are Uninformed," Discussion Paper 2012-040, Tilburg University, Tilburg Law and Economic Center.
  8. Aditi Sengupta, 2012. "Competitive Investment in Clean Technology and Uninformed Green Consumers," Auburn Economics Working Paper Series auwp2012-08, Department of Economics, Auburn University.
  9. Aditi Sengupta, 2010. "Signaling environmental quality to green consumers and the incentive to invest in cleaner technology: Effect of environmental regulation," Departmental Working Papers 1001, Southern Methodist University, Department of Economics.
  10. Dubovik, Andrei & Janssen, Maarten C.W., 2012. "Oligopolistic competition in price and quality," Games and Economic Behavior, Elsevier, vol. 75(1), pages 120-138.
  11. Bontems, Philippe & Mahenc, Philippe, 2014. "Signaling quality in vertical relationships," TSE Working Papers 14-467, Toulouse School of Economics (TSE).
  12. Eric Schmidbauer, 2013. "New and Improved?," Working Papers 2013-01, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  13. Catherine Gendron-Saulnier & Marc Santugini, 2013. "The Informational Benefit of Being Discriminated," Cahiers de recherche 13-02, HEC Montréal, Institut d'économie appliquée.
  14. Leonard J. Mirman & Marc Santugini, 2011. "The Simple Analytics of Price Signaling Quality," Cahiers de recherche 11-04, HEC Montréal, Institut d'économie appliquée.
  15. Maarten C. W. Janssen & Mariya Teteryanikova, 2012. "Horizontal Product Differentiation: Disclosure and Competition," Vienna Economics Papers 1205, University of Vienna, Department of Economics.
  16. Maarten Janssen & Alexei Parakhonyak & Anastasia Parakhonyak, 2014. "Non-reservation price equilibria and Consumer search," HSE Working papers WP BRP 51/EC/2014, National Research University Higher School of Economics.
  17. Slađana Pavlinović, 2013. "Signalling Green Technology Through Price And Eco-Label," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 6, pages 87-94, December.
  18. Andrew F. Daughety & Jennifer F. Reinganum, 2011. "Economic Analysis of Products Liability: Theory," Vanderbilt University Department of Economics Working Papers 1107, Vanderbilt University Department of Economics.

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