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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).
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Keywords
separating equilibrium
price distortion
signaling game
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Corresponding Author(s):
Shane Parendo,Email:sparendo@econ.ucsb.edu; Cheng-Zhong Qin,Email:qin@econ.ucsb.edu
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Issue Date: 05 September 2012
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