Pricing, Signalling, and Sorting with Frictions

Godenhielm Mats (), Klaus Kultti () and Virkola Tuomo
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Godenhielm Mats: Department of Political and Economic Studies, University of Helsinki, P.O. Box 17, FI-00014, Helsinki, Finland
Virkola Tuomo: European University Institute, I-50014 San Domenico di Fiesole (FI), Toscana, Italy

The B.E. Journal of Theoretical Economics, 2020, vol. 20, issue 1, 28

Abstract: We analyse signalling and sorting in a market with frictions and private information. Buyers are heterogeneous, the sellers choose what quality to produce and post prices. Buyers do not observe quality, but infer it from prices. In equilibrium high-quality sellers signal quality with a price that is higher than under perfect information. Compared to the outcome under perfect information the higher price has two effects. First, it makes production of high-quality goods more attractive increasing its supply. Second, it makes high-valuation buyers worse-off, directing part of them to low-quality sellers. We determine which effect dominates; whether too many or too few sellers produce high quality. We also show that the prices of both high- and low-quality goods are higher, and the sellers do better and the buyers worse under private information. In addition, we show that an increase in the production cost of high quality may lead to higher profits and prices.

Keywords: Heterogeneous buyers; endogenous types; signalling; sorting; directedsearch (search for similar items in EconPapers)
JEL-codes: D4 D8 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/bejte-2018-0108

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