Competition and the signaling role of prices

Luca Deidda and Fabrizio Adriani

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: 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 competi- tion among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.

Keywords: signaling; price- setting; price dispersion; market for lemons; competition; adverse selection (search for similar items in EconPapers)
JEL-codes: D4 D8 L15 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-com, nep-cta and nep-ind
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Competition and the signaling role of prices (2011)
Working Paper: Competition and the signaling role of prices (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:201012

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