Signaling Product Quality by Price

Shane Parendo () and Cheng-Zhong Qin ()
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Shane Parendo: Department of Economics, University of California, Santa Barbara, CA 93106, USA
Cheng-Zhong Qin: Department of Economics, University of California, Santa Barbara, CA 93106, USA

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2012, vol. 7, issue 3, 363-372

Abstract: This paper analyzes the role of price as a signal of the quality of a monopoly firm's new product. The quality of the goods is drawn from a continuum and is unknown to consumers. We establish a unique separating equilibrium using equilibrium characterization results for signaling games. The equilibrium price monotonically increases with quality levels and exceeds the complete-information monopoly price for all quality levels but the lowest one. However, the upward distortion decreases as the proportion of pre-informed consumers increases. These results extend both the signaling role of price and characteristics of the separating equilibrium as established in Bagwell and Riordan (1991).

Keywords: separating equilibrium; price distortion; signaling game (search for similar items in EconPapers)
JEL-codes: C72 L15 (search for similar items in EconPapers)
Date: 2012
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