Price signaling and the strategic benefits of price rigidities
We analyze trade between a perfectly informed price setting party (seller) and an imperfectly informed price taker (buyer). Differently from most of the literature, we focus on the case in which, under full information, it would be inefficient to trade goods of sufficiently poor quality. We show that the unique equilibrium surviving D1 is characterized by market breakdown, although trade would be mutually beneficial in some state of nature. This occurs independently of the precision of the information available to the buyer. The model thus implies that signaling through prices may exacerbate the effect of adverse selection rather than mitigate it. Under D1, the seller would always benefit from committing to prices that do not reveal her information. We develop this intuition by analyzing the strategic advantages of price rigidities. We show that price rigidities help restore trade and could even enhance effectiveness of prices as signals of quality.
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.:
- Bester, Helmut & Ritzberger, Klaus, 1998.
"Strategic Pricing, Signalling and Costly Information Acquisition,"
CEPR Discussion Papers
2032, C.E.P.R. Discussion Papers.
- Bester, Helmut & Ritzberger, Klaus, 2001. "Strategic pricing, signalling, and costly information acquisition," International Journal of Industrial Organization, Elsevier, vol. 19(9), pages 1347-1361, November.
- Helmut Bester & Klaus Ritzberger, . "Strategic Pricing, Signalling, and Costly Information Acquisition," Papers 008, Departmental Working Papers.
- Marco Ottaviani, 2000.
"The Value of Public Information in Monopoly,"
Econometric Society World Congress 2000 Contributed Papers
1479, Econometric Society.
- Overgaard, Per Baltzer, 1993. "Price as a signal of quality : A discussion of equilibrium concepts in signalling games," European Journal of Political Economy, Elsevier, vol. 9(4), pages 483-504, November.
- Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004.
"Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets,"
- Mark J. Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 514-533, May.
- Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2003. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Working Papers 2003-07, Bar-Ilan University, Department of Economics.
- Anke S. Kessler, 1996.
"Revisiting the Lemons Market,"
Discussion Paper Serie A
517, University of Bonn, Germany.
- Mailath, George J. & Nöldeke, Georg, 2008.
"Does competitive pricing cause market breakdown under extreme adverse selection?,"
Journal of Economic Theory,
Elsevier, vol. 140(1), pages 97-125, May.
- George J. Mailath & Georg Noldeke, 2007. "Does Competitive Pricing Cause Market Breakdown under Extreme Adverse Selection?," PIER Working Paper Archive 07-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- In-Koo Cho & David M. Kreps, 1997.
"Signaling Games and Stable Equilibria,"
Levine's Working Paper Archive
896, David K. Levine.
- Kyle Bagwell & Michael Riordan, 1988.
"High and Declining Prices Signal Product Quality,"
808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Grossman, Sanford J. & Perry, Motty, 1986. "Perfect sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 39(1), pages 97-119, June.
- 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.
- Rachel E. Kranton, 2003. "Competition and the Incentive to Produce High Quality," Economica, London School of Economics and Political Science, vol. 70(279), pages 385-404, 08.
- 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.
- Laffont, Jean-Jacques & Maskin, Eric, 1987. "Monopoly with asymmetric information about quality : Behavior and regulation," European Economic Review, Elsevier, vol. 31(1-2), pages 483-489.
- Roland Benabou & Jean Tirole, 2003.
"Intrinsic and Extrinsic Motivation,"
Review of Economic Studies,
Wiley Blackwell, vol. 70(3), pages 489-520, 07.
- Levin, Jonathan, 2001.
"Information and the Market for Lemons,"
RAND Journal of Economics,
The RAND Corporation, vol. 32(4), pages 657-66, Winter.
- Wilson, Charles A, 1979. "Equilibrium and Adverse Selection," American Economic Review, American Economic Association, vol. 69(2), pages 313-17, May.
- Bagwell, Kyle, 1991.
"Optimal Export Policy for a New-Product Monopoly,"
American Economic Review,
American Economic Association, vol. 81(5), pages 1156-69, December.
- Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
When requesting a correction, please mention this item's handle: RePEc:eee:gamebe:v:67:y:2009:i:2:p:335-350. 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: (Zhang, Lei)
If references are entirely missing, you can add them using this form.