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Noisy Signaling in Monopoly

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  • Leonard J. Mirman
  • Egas Salgueiro
  • Marc Santugini

    ()
    (IEA, HEC Montréal)

Abstract

We study the informational role of prices in a stochastic environment. We provide a closed-form solution of the monopoly problem when the price imperfectly signals quality to the uninformed buyers. We then study the effect of noise on output, market price, information flows, and expected profits. The presence of noise may reduce the informational externality due to asymmetric information, which increases the firm's expected profits.

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File URL: http://www.hec.ca/iea/cahiers/2011/iea1103_msantugini_v3.pdf
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Bibliographic Info

Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 11-03.

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Length: 18 pages
Date of creation: Mar 2011
Date of revision: May 2013
Handle: RePEc:iea:carech:1103

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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; learning; monopoly; noise; quality; rational expectations; signaling;

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References

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  1. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, American Economic Association, vol. 70(3), pages 393-408, June.
  2. Steven A. Matthews & Leonard J. Mirman, 1981. "Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 494, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. 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.
  4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1315-35, November.
  5. 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, Elsevier, vol. 58(1), pages 94-120, January.
  6. Daher, Wassim & Mirman, Leonard J., 2007. "Market structure and insider trading," International Review of Economics & Finance, Elsevier, Elsevier, vol. 16(3), pages 306-331.
  7. Andrew F. Daughety & Jennifer F. Reinganum, 1994. "Product Safety: Liability, R&D and Signaling," Game Theory and Information, EconWPA 9403007, EconWPA, revised 30 Mar 1994.
  8. Jeitschko, Thomas D. & Normann, Hans-Theo, 2012. "Signaling in deterministic and stochastic settings," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 82(1), pages 39-55.
  9. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Communicating Quality: A Unified Model of Disclosure and Signaling," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0703, Vanderbilt University Department of Economics.
  10. Maarten C.W. Janssen & Santanu Roy, 2007. "Signaling Quality through Prices in an Oligopoly," Tinbergen Institute Discussion Papers, Tinbergen Institute 07-081/1, Tinbergen Institute.
  11. Jennifer F. Reinganum & Andrew F. Daughety, 2004. "Secrecy and Safety," Econometric Society 2004 North American Summer Meetings, Econometric Society 53, Econometric Society.
  12. 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.
  13. Daher, Wassim & Mirman, Leonard J. & Santugini, Marc, 2012. "Information in Cournot: Signaling with incomplete control," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 30(4), pages 361-370.
  14. de Haan, Thomas & Offerman, Theo & Sloof, Randolph, 2011. "Noisy signaling: Theory and experiment," Games and Economic Behavior, Elsevier, Elsevier, vol. 73(2), pages 402-428.
  15. Judd, Kenneth L & Riordan, Michael H, 1994. "Price and Quality in a New Product Monopoly," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(4), pages 773-89, October.
  16. Sanford Grossman, 1989. "The Informational Role of Prices," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262572141, December.
  17. Leonard J. Mirman & Marc Santugini, 2008. "The Informational Role of Prices," Cahiers de recherche, HEC Montréal, Institut d'économie appliquée 08-09, HEC Montréal, Institut d'économie appliquée, revised Apr 2014.
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Citations

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Cited by:
  1. Catherine Gendron-Saulnier & Marc Santugini, 2013. "The Informational Benefit of Being Discriminated," Cahiers de recherche, HEC Montréal, Institut d'économie appliquée 13-02, HEC Montréal, Institut d'économie appliquée.
  2. Catherine Gendron-Saulnier & Marc Santugini, 2013. "When (Not) to Segment Markets," Cahiers de recherche, CIRPEE 1335, CIRPEE.

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