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Signaling Quality Through Prices in an Oligopoly

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Author Info

  • Maarten C.W. Janssen

    () (Tinbergen Institute and Erasmus University)

  • Santanu Roy

    () (Southern Methodist University)

Abstract

Firms signal high quality through high prices even if the market structure is highly competitive and price competition is severe. In a symmetric Bertrand oligopoly where products may differ only in their quality, production cost is increasing in quality and the quality of each firm's product is private information (not known to consumers or to other firms), we show that there exist fully revealing equilibria in mixed strategies. In such equilibria, low quality firms enjoy market power when other firms are of high quality. High quality firms charge higher prices than low quality firms but lose business to rival firms with higher probability. Some of the revealing equilibria involve high degree of market power (price close to full information monopoly level) while others are more "competitive". Under certain conditions, if the number of firms is large enough, information is revealed in every equilibrium.

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Bibliographic Info

Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0709.

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Length: 29 pages
Date of creation: Oct 2007
Date of revision: Nov 2008
Handle: RePEc:smu:ecowpa:709

Contact details of provider:
Postal: Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496
Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

Related research

Keywords: Signaling; Quality; Oligopoly; Incomplete Information.;

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References

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  1. Maarten Janssen & Eric Rasmusen, 2001. "Bertrand Competition Under Uncertainty," CIRJE F-Series CIRJE-F-117, CIRJE, Faculty of Economics, University of Tokyo.
  2. Claude Fluet & Paolo G. Garella, 1999. "Advertising and Prices as Signals of Quality in a Regime of Price Rivalry," Cahiers de recherche du Département des sciences économiques, UQAM 9903, Université du Québec à Montréal, Département des sciences économiques.
  3. Ellingsen, Tore, 1997. "Price signals quality: The case of perfectly inelastic demand," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 43-61, November.
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  10. Fershtman, Chaim, 1982. "Price dispersion in oligopoly," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 389-401, December.
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  13. 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.
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  18. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
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Citations

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Cited by:
  1. Leonard J. Mirman & Marc Santugini, 2011. "The Simple Analytics of Price Signaling Quality," Cahiers de recherche 11-04, HEC Montréal, Institut d'économie appliquée.
  2. Leonard J. Mirman & Marc Santugini, 2011. "Noisy Signaling in Monopoly," Cahiers de recherche 11-03, HEC Montréal, Institut d'économie appliquée.
  3. Bester, Helmut & Demuth, Juri, 2011. "Signalling rivalry and quality uncertainty in a duopoly," Discussion Papers 2011/20, Free University Berlin, School of Business & Economics.
  4. Dubovik, Andrei & Janssen, Maarten C.W., 2012. "Oligopolistic competition in price and quality," Games and Economic Behavior, Elsevier, vol. 75(1), pages 120-138.
  5. Andrew F. Daughety & Jennifer F. Reinganum, 2011. "Economic Analysis of Products Liability: Theory," Vanderbilt University Department of Economics Working Papers 1107, Vanderbilt University Department of Economics.
  6. Leonard J. Mirman & Marc Santugini, 2008. "The Informational Role of Prices," Cahiers de recherche 08-09, HEC Montréal, Institut d'économie appliquée, revised Jan 2013.
  7. Aditi Sengupta, 2010. "Signaling environmental quality to green consumers and the incentive to invest in cleaner technology: Effect of environmental regulation," Departmental Working Papers 1001, Southern Methodist University, Department of Economics.
  8. Maarten C. W. Janssen & Mariya Teteryanikova, 2012. "Horizontal Product Differentiation: Disclosure and Competition," Vienna Economics Papers 1205, University of Vienna, Department of Economics.
  9. Buehler, B. & Schuett, F., 2012. "Certification and Minimum Quality Standards when Some Consumers are Uninformed," Discussion Paper 2012-040, Tilburg University, Tilburg Law and Economic Center.
  10. Aditi Sengupta, 2012. "Competitive Investment in Clean Technology and Uninformed Green Consumers," Auburn Economics Working Paper Series auwp2012-08, Department of Economics, Auburn University.

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