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The Informational Role of Prices

Leonard Mirman and Marc Santugini

Scandinavian Journal of Economics, 2019, vol. 121, issue 2, 606-629

Abstract: We consider a dominant firm with a competitive fringe in order to investigate the informational role of prices. The fringe is necessary for the existence of a unique, fully revealing equilibrium, in which the price reveals the quality of the good to uninformed buyers. A higher price triggers more sales on the part of the competitive fringe, reducing both residual demand and profits. We find that a larger share of uninformed buyers increases the price and reduces the quantity sold by the dominant firm, but increases the quantity sold by the competitive fringe. This, in turn, reduces consumer surplus and welfare.

Date: 2019
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Working Paper: The Informational Role of Prices (2014) Downloads
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Handle: RePEc:bla:scandj:v:121:y:2019:i:2:p:606-629