High and Declining Prices Signal Product Quality

Kyle Bagwell and Michael Riordan

American Economic Review, 1991, vol. 81, issue 1, 224-39

Abstract: High and declining prices signal a high-quality product. High prices are the efficient means of signaling, because the consequent loss of sales volume is most damaging for lower-cost, lower-quality products. As time passes and the number of informed consumers increases, the signaling distortion lessens, resulting in a declining price profile. The prediction of high and declining prices is robust across a variety of dynamic models and is consistent with recent empirical findings. Copyright 1991 by American Economic Association.

Date: 1991
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Working Paper: High and Declining Prices Signal Product Quality (1988)
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