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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Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number
08-09.
Length: 24 pages Date of creation: Sep 2008 Date of revision:
Nov 2009 Handle: RePEc:iea:carech:0809
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