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Incentives for Cost-Reducing Investment in a Signalling Model of Product Quality

  • Shiou Shieh
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    Often, consumers do not observe a firm's cost-reducing investment decision. The investment incentive can be weakened when product quality is unobservable before purchase because consumers do not know whether a lower price arises from lower costs or lower quality. This articles examines this issue in a signalling model with both hidden information (about quality) and hidden action (about investment). Surprisingly, asymmetric information about quality may strengthen or weaken a firm's incentive to adopt a process innovation, depending on whether low-price or high-price signalling is used.

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    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 24 (1993)
    Issue (Month): 3 (Autumn)
    Pages: 466-477

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    Handle: RePEc:rje:randje:v:24:y:1993:i:autumn:p:466-477
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