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Selling signals

Author

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  • Lu, Zhuoran

Abstract

This paper studies a signaling model in which a strategic player can manipulate the cost of signaling. A seller chooses a price scheme for a good, and a buyer with a hidden type chooses how much to purchase as a signal to receivers. When receivers observe the price scheme, the seller charges monopoly prices, and the buyer purchases less than the first best. In contrast, when receivers do not observe the price scheme, the demand for signals is more elastic. In equilibrium, the seller charges lower prices, and the buyer purchases more than when receivers observe the price scheme; the highest types purchase more than the first best. The model suggests that price transparency benefits the seller but harms the buyer. The model can be applied to schools choosing tuition, retailers selling luxury goods and media companies selling advertisements.

Suggested Citation

  • Lu, Zhuoran, 2025. "Selling signals," Journal of Economic Theory, Elsevier, vol. 224(C).
    • Handle: RePEc:eee:jetheo:v:224:y:2025:i:c:s0022053125000122
    DOI: 10.1016/j.jet.2025.105966
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    References listed on IDEAS

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    More about this item

    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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