Price Signaling and Quality Monitoring in Markets for Credence Goods

We explore the interplay between price signaling and independent monitoring for communicating information about the credence attribute of a good, such as environmental quality. We augment the standard model of price signaling allowing consumers to use the results of noisy monitoring as a complementary source of information. We show that monitoring restores the credibility of price signaling by saving partly or fully the signaling cost borne by green rms to deter cheating. A key reason for this is that monitoring compensates for the lack of information resulting from arbitrary beliefs based on surprising prices. The more accurate monitoring, the cheaper price signaling. The signaling behavior of green rms also depends on their number. We determine which proportion of rms choose to improve environmental quality.