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Pricing under noisy signaling

Author

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  • David Feldman

    ()

  • Charles Trzcinka

    ()

  • Russell Winer

    ()

Abstract

We provide rationale, conditions, and insights for “customized” pricing in markets, that is, for equilibria where different buyers pay different prices for similar products. We use a Spence/Riley signaling model enhanced by a signaling methodology under random relations between costs and attributes, developed by Feldman (Math Soc Sci 48:93–101, 2004 ) and Feldman and Winer (Math Soc Sci 48:81–91, 2004 ). Examples include markets for new cars, retail, human capital, trades where transaction costs are negotiable, and transactions where sellers affect buyers’ costs by offering different levels of service or support for the same products and prices. These encompass a large fraction of all assets, prices, and transactions. Our results help explain the different levels of segmentation and product/service differentiation that we observe in markets and the efficiency of these equilibria. We note that we can demonstrate the results within competitive sellers’ markets. Financial markets examples include dividend, initial public offerings, market microstructure and capital structure signaling, and share class distinctions in mutual funds. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • David Feldman & Charles Trzcinka & Russell Winer, 2015. "Pricing under noisy signaling," Review of Quantitative Finance and Accounting, Springer, vol. 45(2), pages 435-454, August.
  • Handle: RePEc:kap:rqfnac:v:45:y:2015:i:2:p:435-454
    DOI: 10.1007/s11156-014-0442-8
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    References listed on IDEAS

    as
    1. Frederik Lundtofte, 2013. "The quality of public information and the term structure of interest rates," Review of Quantitative Finance and Accounting, Springer, vol. 40(4), pages 715-740, May.
    2. Bernhardt, Dan & Douglas, Alan & Robertson, Fiona, 2005. "Testing dividend signaling models," Journal of Empirical Finance, Elsevier, vol. 12(1), pages 77-98, January.
    3. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    4. Michaely, Roni & Shaw, Wayne H, 1994. "The Pricing of Initial Public Offerings: Tests of Adverse-Selection and Signaling Theories," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 279-319.
    5. Moshe Bar Niv (Burnovski) & David Feldman, 2004. "Forum Selection in International Business Contracts: Home Bias Portfolio Puzzle and Managerial Moral Hazard," Review of Quantitative Finance and Accounting, Springer, vol. 22(3), pages 219-232, May.
    6. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
    7. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    8. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, vol. 23(2), pages 303-323, August.
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    11. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    12. Riley, John G., 1975. "Competitive signalling," Journal of Economic Theory, Elsevier, vol. 10(2), pages 174-186, April.
    13. Feldman, David & Winer, Russell S., 2004. "Separating signaling equilibria under random relations between costs and attributes: continuum of attributes," Mathematical Social Sciences, Elsevier, vol. 48(1), pages 81-91, July.
    14. Welch, Ivo, 1989. " Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 44(2), pages 421-449, June.
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    16. John, Kose & Williams, Joseph, 1985. " Dividends, Dilution, and Taxes: A Signalling Equilibrium," Journal of Finance, American Finance Association, vol. 40(4), pages 1053-1070, September.
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    18. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
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    More about this item

    Keywords

    Pricing; Signaling; Asymmetric information; Dividends; Initial public offerings; Capital structure; D82; D49; G12; G35; G32; M30;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M30 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - General

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