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Pricing and Signaling with Frictions

Listed author(s):
  • Alain Delacroix
  • Shouyong Shi

We study a large market with directed search and signaling. Each seller chooses an investment that determines the quality of the good which is the seller's private information. A seller also chooses the price of the good and the number of selling sites. After observing sellers' choices of prices and sites, but not quality, buyers choose which price to search. The sites posting the same price and the buyers searching for that price match with each other randomly. In this environment, a seller's choices of prices and sites can direct buyers' search decisions and signal quality ex-ante. After matching, a buyer also receives an imperfectly informative signal about the quality of the good and decides whether to trade at the posted price. When the latter signal received is sufficiently accurate, we prove that there is a unique equilibrium. Moreover, when the quality differential is large, the equilibrium (under private information) implements the socially efficient allocation under public information. When the quality differential is small, the equilibrium is inefficient in the quality of goods produced or/and the number of sites created. This inefficiency is caused by a conflict between the search-directing role and the signaling role of a posted price. We also compare the price-posting equilibrium with the equilibrium under bargaining. The bargaining equilibrium features efficient quality, but inefficient entry. It is superior to the price-posting equilibrium when a seller's bargaining power is intermediate and the quality differential is small.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-455.

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Date of creation: 18 May 2012
Handle: RePEc:tor:tecipa:tecipa-455
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  1. Peters, Michael & Severinov, Sergei, 1997. "Competition among Sellers Who Offer Auctions Instead of Prices," Journal of Economic Theory, Elsevier, vol. 75(1), pages 141-179, July.
  2. Jean Guillaume Forand, 2007. "Competing Through Information Provision," 2007 Meeting Papers 661, Society for Economic Dynamics.
  3. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle," PIER Working Paper Archive 08-029, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Guido Menzio, 2007. "A Theory of Partially Directed Search," PIER Working Paper Archive 09-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  5. Francisco M. Gonzalez & Shouyong Shi, 2008. "An Equilibrium Theory of Learning, Search and Wages," Working Papers tecipa-328, University of Toronto, Department of Economics.
  6. Shouyong Shi, 2009. "Directed Search for Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 77(2), pages 561-584, 03.
  7. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
  8. Bester, Helmut, 1993. "Bargaining versus Price Competition in Markets with Quality Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 278-288, March.
  9. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  10. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  11. Asher Wolinsky, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 647-658.
  12. Michelacci, Claudio & Suarez, Javier, 2002. "Incomplete Wage Posting," CEPR Discussion Papers 3658, C.E.P.R. Discussion Papers.
  13. Acemoglu, Daron & Shimer, Robert, 1999. "Holdups and Efficiency with Search Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 827-849, November.
  14. William P. Rogerson, 1988. "Price Advertising and the Deterioration of Product Quality," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 215-229.
  15. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  16. Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 78(6), pages 1823-1862, November.
  17. Peters, Michael, 1984. "Bertrand Equilibrium with Capacity Constraints and Restricted Mobility," Econometrica, Econometric Society, vol. 52(5), pages 1117-1127, September.
  18. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  19. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  20. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
  21. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
  22. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-1454, September.
  23. Veronica Guerrieri, 2008. "Inefficient Unemployment Dynamics under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 116(4), pages 667-708, 08.
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