Signaling Quality Through Specialization
Firms frequently position themselves as specialists. An implication of specialization is that the firm has forgone alternative opportunities. In the context of effort-intensive categories, we show that a firm can signal quality to consumers by specializing. In the model, a firm must decide to provide one service offering or to market two services. By entering a single category, the firm incurs an opportunity cost of not entering the secondary profitable category, but may attain reduced costs. The net cost is the signaling cost that a high-quality type firm incurs to signal quality over a low-quality type firm. We show that in homogenous markets, a high-quality type firm signals its high-quality type by specializing in one category. When consumers are heterogeneous, the firm can signal its high-quality type by using prices alone in both the primary and secondary categories. However, specialization can be used as a secondary signal of quality in heterogeneous markets because of lower signaling costs. We also find that signaling using specialization is more likely in the presence of competition.
Volume (Year): 27 (2008)
Issue (Month): 2 (03-04)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
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.:
- Chevalier, Philippe & Tabordon, Nathalie, 2003.
"Overflow analysis and cross-trained servers,"
International Journal of Production Economics,
Elsevier, vol. 85(1), pages 47-60, July.
- CHEVALIER, Philippe & TABORDON, Nathalie, "undated". "Overflow analysis and cross-trained servers," CORE Discussion Papers RP 1656, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-459, March.
- Paul Milgrom & John Roberts, 1998. "Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis," Levine's Working Paper Archive 245, David K. Levine.
- Gary S. Becker & Kevin M. Murphy, 1994. "The Division of Labor, Coordination Costs, and Knowledge," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 299-322 National Bureau of Economic Research, Inc.
- Gary S. Becker & Kevin M. Murphy, 1992. "The Division of Labor, Coordination Costs, and Knowledge," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1137-1160.
- Becker, G.S. & Murphy, K.M., 1991. "The Division of Labor, Coordination Costs, and Knowledge," University of Chicago - Economics Research Center 92-5, Chicago - Economics Research Center.
- Gary S. Murphy Becker & Kevin M., 1992. "The Division of Labor, Coordination Costs, and Knowledge," University of Chicago - George G. Stigler Center for Study of Economy and State 79, Chicago - Center for Study of Economy and State.
- Wujin Chu & Woosik Chu, 1994. "Signaling Quality by Selling Through a Reputable Retailer: An Example of Renting the Reputation of Another Agent," Marketing Science, INFORMS, vol. 13(2), pages 177-189.
- Charles H. Fine, 1986. "Quality Improvement and Learning in Productive Systems," Management Science, INFORMS, vol. 32(10), pages 1301-1315, October.
- Gerard J. Tellis & Birger Wernerfelt, 1987. "Competitive Price and Quality Under Asymmetric Information," Marketing Science, INFORMS, vol. 6(3), pages 240-253.
- 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.
- In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
- Preyas S. Desai & Kannan Srinivasan, 1995. "Demand Signalling Under Unobservable Effort in Franchising: Linear and Nonlinear Price Contracts," Management Science, INFORMS, vol. 41(10), pages 1608-1623, October.
- Guedes, Jose & Thompson, Rex, 1995. "Tests of a Signaling Hypothesis: The Choice between Fixed- and Adjustable-Rate Debt," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 605-636.
- Mike Adams, 1997. "The determinants of actuarial costs in the New Zealand life insurance industry," Applied Financial Economics, Taylor & Francis Journals, vol. 7(1), pages 1-7.
- Foster, George & Gupta, Mahendra, 1990. "Manufacturing overhead cost driver analysis," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 309-337, January.
- Joaquin Maudos & Jose Pastor & Francisco Perez, 2002. "Competition and efficiency in the Spanish banking sector: the importance of specialization," Applied Financial Economics, Taylor & Francis Journals, vol. 12(7), pages 505-516.
- Montgomery, Cynthia A & Wernerfelt, Birger, 1992. "Risk Reduction and Umbrella Branding," The Journal of Business, University of Chicago Press, vol. 65(1), pages 31-50, January.
- Hao Zhao, 2000. "Raising Awareness and Signaling Quality to Uninformed Consumers: A Price-Advertising Model," Marketing Science, INFORMS, vol. 19(4), pages 390-396, January.
- Kannan Srinivasan, 1991. "Multiple Market Entry, Cost Signalling and Entry Deterrence," Management Science, INFORMS, vol. 37(12), pages 1539-1555, December.
- Xiaotong Li, 2005. "Cheap Talk and Bogus Network Externalities in the Emerging Technology Market," Marketing Science, INFORMS, vol. 24(4), pages 531-543, October.
- Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
- Keith Waehrer, 1999. "The ratchet effect and bargaining power in a two-stage model of competitive bidding," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(1), pages 171-181.
- Birger Wernerfelt, 1988. "Umbrella Branding as a Signal of New Product Quality: An Example of Signalling by Posting a Bond," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 458-466, Autumn.
- Drew Fudenberg & Jean Tirole, 1983. "Sequential Bargaining with Incomplete Information," Review of Economic Studies, Oxford University Press, vol. 50(2), pages 221-247.
- Stefanadis, Christodoulos, 1998. "Selective Contracts, Foreclosure, and the Chicago School View," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 429-450, October.
- Sridhar Moorthy & Kannan Srinivasan, 1995. "Signaling Quality with a Money-Back Guarantee: The Role of Transaction Costs," Marketing Science, INFORMS, vol. 14(4), pages 442-466.
- Praveen K. Kopalle & Donald R. Lehmann, 2006. "Setting Quality Expectations When Entering a Market: What Should the Promise Be?," Marketing Science, INFORMS, vol. 25(1), pages 8-24, 01-02.
- Panzar, John C & Willig, Robert D, 1981. "Economies of Scope," American Economic Review, American Economic Association, vol. 71(2), pages 268-272, May.
- Duncan Simester, 1995. "Signalling Price Image Using Advertised Prices," Marketing Science, INFORMS, vol. 14(2), pages 166-188. Full references (including those not matched with items on IDEAS)