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Competition and the signaling role of prices

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Abstract

In a market where sellers are heterogeneous with respect of the quality of their good and are more informed than buyers, high quality sellers' chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competi- tion among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.

Suggested Citation

  • LG Deidda & F. Adriani, 2010. "Competition and the signaling role of prices," Working Paper CRENoS 201012, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:201012
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    Cited by:

    1. Dakshina De Silva & Caroline Elliott & Robert Simmons, 2013. "Restaurant wars," Working Papers 44312700, Lancaster University Management School, Economics Department.
    2. Ying Gao & Xiangpei Hu & Qingkai Ji, 2022. "Quality signaling strategies of experience goods in online–offline channel integration," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(7), pages 2967-2981, October.
    3. Tat-kei Lai & Travis Ng, 2023. "Does Competition Increase Advertising?," Working Papers 2023-iFlame-02, IESEG School of Management.
    4. Adriani, Fabrizio & Deidda, Luca G., 2011. "Competition and the signaling role of prices," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 412-425, July.
    5. Mhd Ruslan, Siti Marsila & Mokhtar, Kasypi, 2020. "An Analysis of Price Disparity: Peninsular Malaysia and Sabah," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 54(2), pages 53-66.
    6. Carroni, Elias & Mantovani, Andrea & Minniti, Antonio, 2023. "Price signaling with salient-thinking consumers," Games and Economic Behavior, Elsevier, vol. 138(C), pages 238-253.
    7. Tat‐kei Lai & Travis Ng, 2023. "Does competition increase advertising?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(6), pages 3233-3248, September.
    8. Gertz, Christopher, 2016. "A Model of Quality Uncertainty with a Continuum of Quality Levels," Center for Mathematical Economics Working Papers 522, Center for Mathematical Economics, Bielefeld University.
    9. Gupta, Aastha, 2023. "Deceptive advertising, regulation and naive consumers," International Journal of Industrial Organization, Elsevier, vol. 91(C).

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    Keywords

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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