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Prices as Signals of Quality in Duopoly

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Author Info
Mark N. Herzendorf (Bureau of Economics, Federal Trade Commission, Washington, D.C.)
Per Baltzer Overgaard (School of Economics and Management, University of Aarhus)

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Abstract

This paper studies price signaling in a multi-sender context with two competing firms. Either firm may offer a high or a low quality, but potential customers are, initially, incompletely informed about the quality available at a given outlet. In particular, consumers do not know a priori whether the goods offered are vertically differentiated or homogenous, and, in the latter case, whether they are of high or low quality. We show that fully revealing equilibria are ruled out by a natural equilibrium refinement, whereas partial revelation of information is possible in equilibrium. However, we note that a non-revealing outcome with standard Bertrand-features (pricing at cost) seems likely, whether the goods offered are vertically differentiated or homogenous.

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File URL: http://www.econ.ku.dk/cie/Discussion%20Papers/2001/pdf/2001-01.pdf
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Publisher Info
Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2001-01.

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Length: 35 pages
Date of creation: Jan 2001
Date of revision:
Handle: RePEc:kud:kuieci:2001-01

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Related research
Keywords: Duopoly signaling; Quality uncertainty; Pooling vs. separation;

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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  1. Andrew F. Daughety & Jennifer F. Reinganum, 2006. "Products Liability, Signaling and Disclosure," Working Papers 0625, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  2. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Communicating Quality: A Unified Model of Disclosure and Signaling," Working Papers 0703, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  3. Andrei Dubovik & Maarten C.W. Janssen, 2008. "Oligopolistic Competition in Price and Quality," Tinbergen Institute Discussion Papers 08-068/1, Tinbergen Institute. [Downloadable!]
  4. Wassim Daher & Leonard J. Mirman & Marc Santugini, 2008. "Asymmetric Information and the Signaling Role of Prices," Cahiers de recherche 08-09, HEC Montréal, Institut d'économie appliquée, revised Nov 2008. [Downloadable!]
  5. Maarten C.W. Janssen & Santanu Roy, 2007. "Signaling Quality Through Prices in an Oligopoly," Departmental Working Papers 0709, Southern Methodist University, Department of Economics, revised Nov 2008. [Downloadable!]
    Other versions:
  6. Andrew F. Daughety & Jennifer F. Reinganum, 2005. "Imperfect Competition and Quality Signaling," Working Papers 0520, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
  7. Andrew F. Daughety & Jennifer F. Reinganum, 2004. "Competition and Confidentiality: Signaling Quality in a Duopoly when there is Universal Private Information," Working Papers 0417, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
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