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Why Do Market Shares Matters? An Information-Based Theory

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  • Vives, X.
  • Ramon, C.

Abstract

We analyse the informational content of market shares and prices in a dynamic duopoly model in which consumers have heterogenous information on the quality differential (q) of two goods. It is shown that when firms are poorly informed about q, and therefore the ability of prices to reveal information is limited, consumers rationally believe that a firm with a high market share is likely to produce a high-quality good. As a result, firms try to signal-jam the inferences of consumers and compete for market shares beyond the level explained by short-run profit maximization. The consequence is that the market is more competitive in the first stages of the game and approaches the benchmark one-shot full information equilibrium prices as consumers and firms learn about q. Further, it is found that consumers display herd behaviour with the consequence that they learn q slowly, slowing down, in turn, the rate of convergence of prices to their benchmark levels. When firms are informed about q, and prices have the potential to signal quality, multiple equilibria may exist, but there is always one equilibrium in which market shares are a positive signal of quality.
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Suggested Citation

  • Vives, X. & Ramon, C., 1992. "Why Do Market Shares Matters? An Information-Based Theory," UFAE and IAE Working Papers 192.92, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  • Handle: RePEc:aub:autbar:192.92
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    Keywords

    oligopolies ; economic models;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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