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Oligopolistic Competition in Price and Quality

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  • Andrei Dubovik

    ()
    (Erasmus University Rotterdam)

  • Maarten C.W. Janssen

    ()
    (University of Vienna)

Abstract

We consider an oligopolistic market where firms compete in price and quality and where consumers are heterogeneous in knowledge: some consumers know both the prices and quality of the products offered, some know only the prices and some know neither. We show that two types of signalling equilibria are possible. Both are characterised by dispersion and Pareto-inefficiency of the price/quality offers. But, better price/quality combinations are signalled with lower prices in one type and with higher prices in the other type.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 08-068/1.

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Date of creation: 14 Jul 2008
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Handle: RePEc:dgr:uvatin:20080068

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Related research

Keywords: oligopoly; competition; price; quality; imperfect information; signalling;

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References

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  1. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
  2. Andrew F. Daughety & Jennifer F. Reinganum, 2005. "Imperfect Competition and Quality Signaling," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0520, Vanderbilt University Department of Economics.
  3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262200716, December.
  4. Armstrong, Mark & Chen, Yongmin, 2007. "Inattentive Consumers and Product Quality," MPRA Paper 4797, University Library of Munich, Germany.
  5. Janssen, Maarten C. W. & van Reeven, Peran, 1998. "Market Prices and Illegal Practices," International Review of Law and Economics, Elsevier, Elsevier, vol. 18(1), pages 51-60, March.
  6. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(2), pages 197-207, April.
  7. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 615-41, August.
  8. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, American Economic Association, vol. 81(1), pages 224-39, March.
  9. Maarten C.W. Janssen & Santanu Roy, 2007. "Signaling Quality Through Prices in an Oligopoly," Departmental Working Papers, Southern Methodist University, Department of Economics 0709, Southern Methodist University, Department of Economics, revised Nov 2008.
  10. Andrew F. Daughety & Jennifer F. Reinganum, 2004. "Competition and Confidentiality: Signaling Quality in a Duopoly when there is Universal Private Information," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0417, Vanderbilt University Department of Economics.
  11. Mark N. Herzendorf & Per Baltzer Overgaard, 2001. "Prices as Signals of Quality in Duopoly," CIE Discussion Papers, University of Copenhagen. Department of Economics. Centre for Industrial Economics 2001-01, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  12. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(4), pages 647-58, October.
  13. Chan, Yuk-Shee & Leland, Hayne, 1982. "Prices and Qualities in Markets with Costly Information," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(4), pages 499-516, October.
  14. Rogerson, William P, 1988. "Price Advertising and the Deterioration of Product Quality," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 55(2), pages 215-29, April.
  15. Schwartz, Alan & Wilde, Louis L, 1985. "Product Quality and Imperfect Information," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(2), pages 251-62, April.
  16. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, American Economic Association, vol. 70(4), pages 651-59, September.
  17. Besancenot, Damien & Vranceanu, Radu, 2004. "Quality and price dispersion in an equilibrium search model," Journal of Economics and Business, Elsevier, Elsevier, vol. 56(2), pages 99-116.
  18. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 69, pages 213.
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Cited by:
  1. Armstrong, Mark, 2014. "Search and Ripoff Externalities," MPRA Paper 57958, University Library of Munich, Germany.

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