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Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

Postal Subscription Code 80-978

Front Econ Chin    2012, Vol. 7 Issue (3) : 363-372    https://doi.org/10.3868/s060-001-012-0016-1
research-article
Signaling Product Quality by Price
Shane Parendo(), Cheng-Zhong Qin()
Department of Economics, University of California, Santa Barbara, CA 93106, USA
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Abstract

This paper analyzes the role of price as a signal of the quality of a monopoly firm's new product. The quality of the goods is drawn from a continuum and is unknown to consumers. We establish a unique separating equilibrium using equilibrium characterization results for signaling games. The equilibrium price monotonically increases with quality levels and exceeds the complete-information monopoly price for all quality levels but the lowest one. However, the upward distortion decreases as the proportion of pre-informed consumers increases. These results extend both the signaling role of price and characteristics of the separating equilibrium as established in Bagwell and Riordan (1991).

Keywords separating equilibrium      price distortion      signaling game     
Corresponding Author(s): Shane Parendo,Email:sparendo@econ.ucsb.edu; Cheng-Zhong Qin,Email:qin@econ.ucsb.edu   
Issue Date: 05 September 2012
 Cite this article:   
Shane Parendo,Cheng-Zhong Qin. Signaling Product Quality by Price[J]. Front Econ Chin, 2012, 7(3): 363-372.
 URL:  
https://academic.hep.com.cn/fec/EN/10.3868/s060-001-012-0016-1
https://academic.hep.com.cn/fec/EN/Y2012/V7/I3/363
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