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High and Declining Prices Signal Product Quality

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  • Bagwell, Kyle
  • Riordan, Michael H

Abstract

High and declining prices signal a high-quality product. High prices are the efficient means of signaling, because the consequent loss of sales volume is most damaging for lower-cost, lower-quality products. As time passes and the number of informed consumers increases, the signaling distortion lessens, resulting in a declining price profile. The prediction of high and declining prices is robust across a variety of dynamic models and is consistent with recent empirical findings. Copyright 1991 by American Economic Association.

Suggested Citation

  • Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.
    • Handle: RePEc:aea:aecrev:v:81:y:1991:i:1:p:224-39
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