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Information in Cournot: Signaling with Incomplete Control

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  • Wassim DAHER
  • Leonard J. MIRMAN
  • Marc Santugini

    ()
    (IEA, HEC Montréal)

Abstract

We embed signaling in the classical Cournot model in which several firms sell a homogeneous good. The quality is known to all the firms, but only to some buyers. The quantity-setting firms can manipulate the price to signal quality. Because there is only one price in a market for a homogeneous good, each firm incompletely controls the price-signal through the quantity decision. We characterize the unique signaling Cournot equilibrium in which the price signals quality to the uninformed buyers. We then compare the signaling Cournot equilibrium with the full-information Cournot equilibrium. Signaling is shown to increase the equilibrium price. Moreover, under certain conditions regarding the composition of buyers, the number of firms, and the distribution of costs across firms, the effects of signalling and market externality cancel each other. In other words, the profits under signaling Cournot equal the profits of a cartel in a full-information environment.

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Bibliographic Info

Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 09-09.

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Length: 35 pages
Date of creation: Dec 2009
Date of revision: Nov 2011
Handle: RePEc:iea:carech:0909

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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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Keywords: Cournot; Homogeneous good; Learning; Quality; Signaling.;

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References

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  1. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Communicating Quality: A Unified Model of Disclosure and Signaling," Vanderbilt University Department of Economics Working Papers 0703, Vanderbilt University Department of Economics.
  2. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
  3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
  4. Grossman, Sanford J & Kihlstrom, Richard E & Mirman, Leonard J, 1977. "A Bayesian Approach to the Production of Information and Learning by Doing," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 533-47, October.
  5. Anderson, Simon P & Renault, Regis, 2000. "Consumer Information and Firm Pricing: Negative Externalities from Improved Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 721-42, August.
  6. Koulovatianos, Christos & Mirman, Leonard J. & Santugini, Marc, 2009. "Optimal growth and uncertainty: Learning," Journal of Economic Theory, Elsevier, vol. 144(1), pages 280-295, January.
  7. Janssen, Maarten C.W. & Roy, Santanu, 2010. "Signaling quality through prices in an oligopoly," Games and Economic Behavior, Elsevier, vol. 68(1), pages 192-207, January.
  8. Andrew Daughety & Jennifer Reinganum, . "Secrecy and Safety," American Law & Economics Association Annual Meetings 1039, American Law & Economics Association.
  9. Mirman,Leonard & Samuelson,Larry & Urbano,Amparo, . "Duopoly signal jamming," Discussion Paper Serie B 199, University of Bonn, Germany.
  10. Mirman Leonard J. & Samuelson Larry & Schlee Edward E., 1994. "Strategic Information Manipulation in Duopolies," Journal of Economic Theory, Elsevier, vol. 62(2), pages 363-384, April.
  11. Andrew F. Daughety & Jennifer F. Reinganum, 2008. "Imperfect competition and quality signalling," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 163-183.
  12. Aghion, P. & Bolton, P. & Harris, C. & Jullien, B., 1990. "Optimal Learning By Experimentation," DELTA Working Papers 90-10, DELTA (Ecole normale supérieure).
  13. Daughety, Andrew F. & Reinganum, Jennifer F., 2007. "Competition and confidentiality: Signaling quality in a duopoly when there is universal private information," Games and Economic Behavior, Elsevier, vol. 58(1), pages 94-120, January.
  14. Aghion, Philippe, et al, 1991. "Optimal Learning by Experimentation," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 621-54, July.
  15. 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.
  16. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 647-58, October.
  17. Fabio Caldieraro & Dongsoo Shin & Andrew Stivers, 2011. "Voluntary Quality Disclosure under Price‐Signaling Competition," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 32, pages 493-504, December.
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Cited by:
  1. Catherine Gendron-Saulnier & Marc Santugini, 2013. "The Informational Benefit of Being Discriminated," Cahiers de recherche 13-02, HEC Montréal, Institut d'économie appliquée.
  2. Mirman, Leonard J. & Salgueiro, Egas M. & Santugini, Marc, 2014. "Noisy signaling in monopoly," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 504-511.

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