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High and Declining Prices Signal Product Quality

  • Bagwell, Kyle
  • Riordan, Michael H

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.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 81 (1991)
Issue (Month): 1 (March)
Pages: 224-39

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Handle: RePEc:aea:aecrev:v:81:y:1991:i:1:p:224-39
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  1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-94, July.
  2. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
  3. Chan, Yuk-Shee & Leland, Hayne, 1982. "Prices and Qualities in Markets with Costly Information," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 499-516, October.
  4. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
  5. 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.
  6. Edward P. Lazear, 1984. "Retail Pricing and Clearance Sales," NBER Working Papers 1446, National Bureau of Economic Research, Inc.
  7. Cooper, Russell & Ross, Thomas W., 1985. "Monopoly provision of product quality with uninformed buyers," International Journal of Industrial Organization, Elsevier, vol. 3(4), pages 439-449, December.
  8. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-37, September.
  9. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  10. Cooper, Russell & Ross, Thomas W, 1984. "Prices, Product Qualities and Asymmetric Information: The Competitive Case," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 197-207, April.
  11. Cho, In-Koo, 1987. "A Refinement of Sequential Equilibrium," Econometrica, Econometric Society, vol. 55(6), pages 1367-89, November.
  12. Gerard J. Tellis & Birger Wernerfelt, 1987. "Competitive Price and Quality Under Asymmetric Information," Marketing Science, INFORMS, vol. 6(3), pages 240-253.
  13. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 647-58, October.
  14. Kyle Bagwell & Michael Riordan, 1986. "Equilibrium Price Dynamics for an Experience Good," Discussion Papers 705, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February.
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