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Pricing and signaling with frictions

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  • Delacroix, Alain
  • Shi, Shouyong

Abstract

We study a market where each seller chooses the quality and price of goods and the number of selling sites. Observing sellersʼ choices of prices and sites, but not quality, buyers choose which site to visit. A sellerʼs choices of prices can direct buyersʼ search and signal quality. A unique equilibrium exists and is separating. When the quality differential is large, the equilibrium implements the efficient allocation with public information. Otherwise, the quality of goods and/or the number of sites created is inefficient, due to a conflict between the search-directing and signaling roles of prices.

Suggested Citation

  • Delacroix, Alain & Shi, Shouyong, 2013. "Pricing and signaling with frictions," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1301-1332.
    • Handle: RePEc:eee:jetheo:v:148:y:2013:i:4:p:1301-1332
    DOI: 10.1016/j.jet.2013.04.006
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    More about this item

    Keywords

    Search; Signaling; Pricing; Efficiency; Bargaining;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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