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Pricing to Signal Product Line Quality

  • Bagwell, Kyle

This paper offers a general characterization of the optimal product line prices for a monopolist whose quality of products is initially unknown to consumers. In the focal equilibrium, a monopolist signals a high-quality product line by pricing as if quality were known to be high, but costs of production were higher than they truly are. In a rich set of environments, this characterization implies that the prices of all products are initially distorted upward, with the price distortion being largest for products with the most inelastic demands and/or quality-sensitive production costs. These implications yield predictions for the time path of prices that are broadly consistent with evidence from the marketing literature. The multidimensional signaling problem is made tractable by the satisfaction of a very simple and powerful single crossing property. Copyright 1992 by MIT Press.

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Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 1 (1992)
Issue (Month): 1 (Spring)
Pages: 151-74

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Handle: RePEc:bla:jemstr:v:1:y:1992:i:1:p:151-74
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  1. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  2. Gerard J. Tellis & Birger Wernerfelt, 1987. "Competitive Price and Quality Under Asymmetric Information," Marketing Science, INFORMS, vol. 6(3), pages 240-253.
  3. Kyle Bagwell, 1990. "Optimal Export Policy for a New-Product Monopoly," Discussion Papers 898, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Bagwell, Kyle & Ramey, Garey, 1990. "Advertising and pricing to deter or accommodate entry when demand is unknown," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 93-113.
  5. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March.
  6. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  7. Kyle Bagwell & Garey Ramey, 1987. "Advertising and Limit Pricing," Discussion Papers 729, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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