Signaling endogenous product quality with price in the presence of consumer boycotts

This paper constructs a two‐period model of price signaling, where an entry firm sells experience goods with endogenous product quality while its cost efficiency of producing quality and product quality may be private information at first. The main results show that when firms' cost efficiencies are known but product quality is unobservable, the entrant reduces both the quality and price compared to the scenario with perfect information, as consumers can infer the quality from the observed costs, making price signaling unnecessary. When both cost efficiency and product quality are unknown, this does not further affect quality but leads to the entrant using prices to signal its cost type. However, the pooling outcome Pareto‐dominates the separating one. If consumers boycott upon perceiving deceitful product quality, the entrants with different cost efficiencies choose distinct prices to avoid demand loss, fostering the emergence of separating equilibria, which can enhance consumer surplus.