Adriani, Fabrizio and Deidda, Luca (2008): Competition and the signaling role of prices.
Download (335kB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Competition and the signaling role of prices|
|English Title:||Competition and the signaling role of prices|
|Keywords:||Market for lemons, Adverse selection, Price dispersion, Price-setting, Signaling, Competition|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information; Mechanism Design
D - Microeconomics > D4 - Market Structure and Pricing > D40 - General
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality; Standardization and Compatibility
|Depositing User:||Fabrizio Adriani|
|Date Deposited:||08. Jul 2009 02:32|
|Last Modified:||12. Feb 2013 09:48|
 Adriani, F., and L. G. Deidda, 2006. Competition and the Signaling Role of Prices. DeFiMS discussion paper.
 Adriani, F., and L. G. Deidda, 2009. Price Signaling and the Strategic Benefits of Price Rigidities. Games and Economic Behavior, forthcoming.
 Akerlof, G. A. 1970. The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. Quarterly Journal of Economics. 84: 488-500.
 Bagwell, K. 1991. Optimal Export Policy for a New-Product Monopoly. American Economic Review. 81: 1156-1169.
 Bagwell, K. and M.H. Riordan 1991. High and Declining Prices Signal Product Quality. American Economic Review. 81: 224-239.
 Banks, J., and J. Sobel, 1987. Equilibrium Selection in Signaling Games. Econometrica. 55: 647-662.
 Baye, M.R., J. Morgan, and P. Scholten, 2004. Price Dispersion in the Small and in the Large: Evidence from an Internet Price Comparison Site. Journal of Industrial Economics. 52: 463-96.
 Bester, H., 1993. Bargaining versus Price Competition in Markets with Quality Uncertainty. American Economic Review. 83: 278-288.
 Cho, I. K., and D. M. Kreps, 1987. Signaling Games and Stable Equilibria. Quarterly Journal of Economics. 102: 179-221.
 Cho, I. K., and J. Sobel, 1990. Strategic Stability and Uniqueness in Signaling Games. Journal of Economic Theory. 50: 381-413.
 Clay K.,R. Krishnan, and E. Wolff, 2001. Prices and Price Dispersion on the Web: Evidence from the Online Book Industry. Journal of Industrial Economics.49:521-539.
 Cooper R., and T.W. Ross, 1984. Prices, Product Qualities, and Asymmetric Information: The Competitive Case. Review of Economic Studies 51: 197-207.
 Daughety, A. F, and J. F. Reinganum, 2005. Imperfect Competition and Quality Signaling. Rand Journal of Economics. 39: 163-183.
 Daughety, A. F, and J. F. Reinganum, 2007. Competition and confidentiality: Signaling quality in a duopoly when there is universal private information. Games and Economic Behaviour 58: 94-120.
 Ellingsen, T. 1997. Price Signals Quality: The Case of Perfectly Inelastic Demand. International Journal of Industrial Organization. 16: 43-61.
 Fudenberg, D., and J. Tirole, 1991. Game Theory. MIT Press.
 Grossman, S. J., and M. Perry, 1986. Perfect Sequential Equilibrium. Journal of Economic Theory. 39: 97-119.
 Gul F., and A. Postlewaite, 1993. Asymptotic Efficiency in Large Exchange Economies with Asymmetric Information. Econometrica. 60: 1273-1292.
 Hellmann, T., and J. Stiglitz, 2000. Credit and equity rationing in markets with adverse selection. European Economic Review Volume 44: 281-304.
 Huck, S., Lnser, G.K., and J.-R. Tyran, 2007. Pricing and Trust. Mimeo.
 Janssen, M. C. W., and S. Roy, 2002. Dynamic trading in a Durable Good Market with Asymmetric Information. International Economic Review. 43: 257-282.
 Judd, K. L., 1985. The law of large numbers with a continuum of IID random variables. Journal of Economic theory. 35: 19-25.
 Kohlberg E., and J.-F. Mertens, 1986. On the Strategic Stability of Equilibria. Econometrica. 54: 1003-1038.
 Laffont, J.- J., and E. Maskin. 1987. Monopoly with Asymmetric Information about Quality. European Economic Review. 31: 483-489.
 Laffont, J.-J., and E. Maskin. 1989. Rational Expectations with Imperfect Information. Economics Letters. 30: 269-274.
 Lin, Y.C., and P. Scholten. 2005. Pricing Behaviors of Firms on the Internet. Evidence from Price Comparison Sites Cnet and Nextag. Mimeo.
 Mailath, G. J., Okuno-Fujiwara M., and A. Postlewaite. 1993. Belief-Based Refinements in Signaling Games. Journal of Economic Theory. 60: 241-276.
 Milgrom, P., and J. Roberts. 1986. Price and Advertising Signals of Product Quality. Journal of Political Economy. 94: 796-821.
 Moreno, D., and J. Wooders. 2007. Decentralized Trade Mitigates the Lemons Problem. Universidad Carlos III.
 Muthoo, A., and S. Mutuswami. 2005. Competition and Efficiency in Markets with Quality Uncertainty. Mimeo.
 Overgaard P. B., 1993. Price as a Signal of Quality: a Discussion of Equilibrium Concepts in Signalling Games. European Journal of Political Economy. 9: 483-504.
 Stiglitz, J. and A. Weiss, 1981. Credit Rationing in Markets with Imperfect Information. American Economic Review. 71: 393-410.
 Villeneuve, B., 2005. Competition Between Insurers with Superior Information. European Economic Review. 49: 321-340.
 Wilson, C., 1979. Equilibrium and Adverse Selection. American Economic Review. 69: 313-317.
 Wilson, C., 1980. The Nature of Equilibrium in Markets with Adverse Selection. Bell Journal of Economics. 11: 108-130.
 Wolinsky, A., 1983. Prices as Signals of Product Quality. Review of Economic Studies. 50: 647-658.