The Informational Role of Prices

Leonard Mirman and Marc Santugini ()
Additional contact information
Marc Santugini: IEA, HEC Montréal, http://www.hec.ca/iea/

No 08-09, Cahiers de recherche from HEC Montréal, Institut d'économie appliquée

Abstract: We study the informational role of prices. To that end, we consider the framework of a dominant firm with a competitive fringe. When the competitive fringe is large enough, there exists a unique fully revealing equilibrium, in which the price conveys full information about the quality of the good to uninformed buyers. Deceiving the uninformed buyers by charging a high price and mimicking a high quality is not profitable when the competitive fringe is large enough. Since a higher price triggers more sales on the part of the competitive fringe, residual demand and thus profits are reduced. We also study the effect of asymmetric information and learning on the equilibrium outcomes. More uninformed buyers increases the price, reduces the quantity sold by the dominant firm, but increases the quantity sold by the competitive fringe.

Keywords: Asymmetric information; Dominant Firm with Fringe Competition; Informational externality; Learning; Quality; Signaling. (search for similar items in EconPapers)
JEL-codes: D21 D42 D82 D83 D84 L12 L15 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2008-09, Revised 2014-04
New Economics Papers: this item is included in nep-cfn, nep-com, nep-cta, nep-gth, nep-ind, nep-mic and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The Informational Role of Prices (2019)
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