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The Signaling Role of Prices: Monopoly

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Author Info
Leonard J. Mirman
Marc Santugini () (IEA, HEC Montréal)

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Abstract

We consider a single market in which a monopolist supplies a good to price-taking buyers. The quality is known to the monopolist, but only to some buyers. The remaining buyers are uninformed, but anticipate learning about the quality from observing the price. The quality of the good is a variable that takes on a continuum of positive values. In contrast to previous studies, the learning buyers' beliefs (including out-of-equilibrium beliefs) about the quality come directly from the structure of the economy, i.e., consistent with the market-clearing condition and the monopolist's behavior. We show that there exists a unique separating equilibrium (fully revealing rational expectations equilibrium) in which the price conveys all the information. We also show that there is no pooling equilibrium (non-revealing rational expectations equilibrium). Because our approach yields a tractable and unique equilibrium, we are able to study comparative statics on the equilibrium as well as a comparison of the signaling equilibrium with the benchmark full information equilibrium.

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File URL: http://www2.hec.ca/iea/cahiers/2008/iea0809_msantugini_v4.pdf
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Publisher Info
Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 08-09.

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Length: 24 pages
Date of creation: Sep 2008
Date of revision: Nov 2009
Handle: RePEc:iea:carech:0809

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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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Related research
Keywords: Asymmetric information; firm behavior; learning; signaling.;

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March. [Downloadable!] (restricted)
    Other versions:
  2. Judd, K.L. & Riordan, M.H., 1989. "Price And Quality In A New Product Monopoly," Papers e-89-8, Stanford - Hoover Institution.
    Other versions:
  3. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  4. Mark N. Herzendorf & Per Baltzer Overgaard, 2001. "Prices as Signals of Quality in Duopoly," CIE Discussion Papers 2001-01, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
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This page was last updated on 2009-11-26.


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