Asymmetric Information and the Signaling Role of Prices

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Asymmetric Information and the Signaling Role of Prices

Author Info

Wassim Daher
Leonard J. Mirman
Marc Santugini () (IEA, HEC Montréal)

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Abstract

We study asymmetric information and the signaling role of prices in a noiseless and imperfectly competitive environment. Here, the price is determined by market forces. After describing the general model, we study information flows in applications of industrial organization and finance: a quantity-setting monopoly, Cournot oligopoly, and a model of choice and allocation of a risky asset. For each application, there is a unique signaling equilibrium in which the price conveys all the information. Moreover, the signaling equilibrium differs from the full information equilibrium.

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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: 40 pages
Date of creation: Sep 2008
Date of revision: Nov 2008
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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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D40 - Microeconomics - - Market Structure and Pricing - - - General
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-10-07 (All new papers)
NEP-CFN-2008-10-07 (Corporate Finance)
NEP-COM-2008-10-07 (Industrial Competition)
NEP-CTA-2008-10-07 (Contract Theory & Applications)
NEP-GTH-2008-10-07 (Game Theory)
NEP-IND-2008-10-07 (Industrial Organization)
NEP-MIC-2008-10-07 (Microeconomics)
NEP-MST-2008-10-07 (Market Microstructure)

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.:

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:
- Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
Judd, K.L. & Riordan, M.H., 1989. "Price And Quality In A New Product Monopoly," Papers e-89-8, Stanford - Hoover Institution.
Other versions:
- Judd, Kenneth L & Riordan, Michael H, 1994. "Price and Quality in a New Product Monopoly," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 773-89, October. [Downloadable!] (restricted)
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.
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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