The Informational Role of Prices
We study the informational role of prices. To that end, we consider the framework of a dominant firm with a competitive fringe. When the competitive fringe is large enough, there exists a unique fully revealing equilibrium, in which the price conveys full information about the quality of the good to uninformed buyers. Deceiving the uninformed buyers by charging a high price and mimicking a high quality is not profitable when the competitive fringe is large enough. Since a higher price triggers more sales on the part of the competitive fringe, residual demand and thus profits are reduced. We also study the effect of asymmetric information and learning on the equilibrium outcomes. More uninformed buyers increases the price, reduces the quantity sold by the dominant firm, but increases the quantity sold by the competitive fringe.
|Date of creation:||Sep 2008|
|Date of revision:||Apr 2014|
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- Sanford J Grossman & Joseph E Stiglitz, 1997.
"On the Impossibility of Informationally Efficient Markets,"
Levine's Working Paper Archive
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"Signaling Quality Through Prices in an Oligopoly,"
Departmental Working Papers
0709, Southern Methodist University, Department of Economics, revised Nov 2008.
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- Bagwell, Kyle & Riordan, Michael H, 1991.
"High and Declining Prices Signal Product Quality,"
American Economic Review,
American Economic Association, vol. 81(1), pages 224-39, March.
- Kenneth L. Judd & Michael H. Riordan, 1994. "Price and Quality in a New Product Monopoly," Review of Economic Studies, Oxford University Press, vol. 61(4), pages 773-789.
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