Competition and confidentiality: Signaling quality in a duopoly when there is universal private information
How does the need to signal quality through price affect equilibrium pricing and profits, when a firm faces a similarly-situated rival? In this paper, we provide a model of non-cooperative signaling by two firms that compete over a continuum of consumers. We assume "universal incomplete information;" that is, each market participant has some private information: each consumer has private information about the intensity of her preferences for the firms' respective products and each firm has private information about its own product's quality. We characterize a symmetric separating equilibrium in which each firm's price reveals its respective product quality. We focus mainly on a model in which the quality attribute is safety (so that the legal system is brought into play) and quality is unobservable due to the use of confidential settlements; a particular specification of parameters yields a common model from the industrial organization literature in which quality is interpreted as the probability that a consumer will find the good satisfactory. We show that the equilibrium prices, the difference between those prices, the associated outputs, and profits are all increasing functions of the ex ante probability of high safety. When quality is interpreted as consumer satisfaction, unobservable quality causes all prices to be distorted upward, and lowers average quality and ex ante expected social welfare, but increases ex ante expected firm profits (when either the probability of high quality or the extent of horizontal product differentiation is sufficiently high). When quality is interpreted as product safety, the foregoing results are modified in that for some parameter values ex ante expected social welfare is higher under confidentiality because such legal secrecy lowers expected litigation costs.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew F. Daughety & Jennifer F. Reinganum, 1994.
"Product Safety: Liability, R&D and Signaling,"
Game Theory and Information
9403007, EconWPA, revised 30 Mar 1994.
- Orzach, Ram & Tauman, Yair, 1996. "Signalling Reversal," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 453-464, May.
- Mailath, George J., 1988. "An abstract two-period game with simultaneous signaling--Existence of separating equilibria," Journal of Economic Theory, Elsevier, vol. 46(2), pages 373-394, December.
- 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.
- Fluet, Claude & Garella, Paolo G., 2002. "Advertising and prices as signals of quality in a regime of price rivalry," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 907-930, September.
- Kyle Bagwell & Garey Ramey, 1989.
"Oligopoly Limit Pricing,"
829, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Das Varma, Gopal, 2003. "Bidding for a process innovation under alternative modes of competition," International Journal of Industrial Organization, Elsevier, vol. 21(1), pages 15-37, January.
- Yang, Bill Z., 1996. "Litigation, experimentation, and reputation," International Review of Law and Economics, Elsevier, vol. 16(4), pages 491-502, December.
- Mark N. Hertzendorf & Per Baltzer Overgaard, 2001. "Price Competition and Advertising Signals: Signaling by Competing Senders," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(4), pages 621-662, December.
- 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.
- Jennifer F. Reinganum & Andrew F. Daughety, 2004.
"Secrecy and Safety,"
Econometric Society 2004 North American Summer Meetings
53, Econometric Society.
- Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Secrecy and Safety," Vanderbilt University Department of Economics Working Papers 0317, Vanderbilt University Department of Economics, revised Sep 2003.
- Andrew Daughety & Jennifer Reinganum, "undated". "Secrecy and Safety," American Law & Economics Association Annual Meetings 1039, American Law & Economics Association.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
- Andrew F. Daughety & Jennifer F. Reinganum, 2002. "Informational Externalities in Settlement Bargaining: Confidentiality and Correlated Culpability," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 587-604, Winter.
- Matthews, Steven A & Mirman, Leonard J, 1983.
"Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand,"
Econometric Society, vol. 51(4), pages 981-996, July.
- Steven A. Matthews & Leonard J. Mirman, 1981. "Equilibrium Limit Pricing: The Effects of Private Information and Stochastic Demand," Discussion Papers 494, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- In-Koo Cho & David M. Kreps, 1987.
"Signaling Games and Stable Equilibria,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 102(2), pages 179-221.
- 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 615-641, August.
- Helmut Bester, 1998. "Quality Uncertainty Mitigates Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 828-844, Winter.
- Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414.
- Kyle Bagwell, 1991.
"Pricing to Signal Product Line Quality,"
921, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Laurent Linnemer, 1998. "Entry Deterrence, Product Quality: Price and Advertising as Signals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(4), pages 615-645, December.
- Kyle Bagwell & Michael Riordan, 1988.
"High and Declining Prices Signal Product Quality,"
808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
- Nancy A. Lutz, 1989. "Warranties as Signals under Consumer Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 239-255, Summer.
- Mark N. Hertzendorf, 1993. "I'm Not a High-Quality Firm -- But I Play One on TV," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 236-247, Summer.
- Joseph E. Harrington Jr., 1987. "Oligopolistic Entry Deterrence under Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 211-231, Summer.
- George J. Mailath, 1989. "Simultaneous Signaling in an Oligopoly Model," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 417-427.
- Martin, Stephen, 1995. "Oligopoly limit pricing: Strategic substitutes, strategic complements," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 41-65, March.
When requesting a correction, please mention this item's handle: RePEc:eee:gamebe:v:58:y:2007:i:1:p:94-120. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.