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Competition and the signaling role of prices

  • Adriani, Fabrizio
  • Deidda, Luca

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 competition among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.

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File URL: https://mpra.ub.uni-muenchen.de/16108/1/MPRA_paper_16108.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16108.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:16108
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  1. E. Kohlberg & J.-F. Mertens, 1998. "On the Strategic Stability of Equilibria," Levine's Working Paper Archive 445, David K. Levine.
  2. 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.
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