Imperfect Competition and Quality Signaling

Andrew Daughety and Jennifer Reinganum ()

No 520, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: We examine the interplay of imperfect competition and incomplete information in the context of price competition among firms producing horizontally- and vertically-differentiated substitute products. We find that incomplete information about vertical quality (e.g., consumer satisfaction) that is signaled via price softens price competition, and that imperfect competition can reduce the degree to which firms distort their prices to signal their types (relative to what a monopolist would do). We show that low-quality firms always prefer playing the incomplete information game to the full-information analog: their prices are higher and so are their profits. Moreover, for "high-value" markets, if the proportion of high-quality firms is great enough, high-quality firms also prefer incomplete information to full information. We find conditions such that an increase in the loss to consumers associated with consuming the low-quality product may perversely benefit low-quality firms. We discuss the implications of our analysis for recent tort reform proposals, incentives for the diffusion of general innovation to product-specific improvements, and professional licensing.

Keywords: Imperfect competition; quality; signaling; oligopoly (search for similar items in EconPapers)
JEL-codes: D43 D82 K13 L15 (search for similar items in EconPapers)
Date: 2005-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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http://www.accessecon.com/pubs/VUECON/vu05-w20.pdf Revised version, 2005 (application/pdf)

Related works:
Journal Article: Imperfect competition and quality signalling (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:0520

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