Price and Quality in a New Product Monopoly

Kenneth Judd and Michael H. Riordan

The Review of Economic Studies, 1994, vol. 61, issue 4, 773-789

Abstract: In a signal-extraction model of consumer behaviour, higher prices signal higher-quality products for a new product monopoly, even without cost asymmetries across different qualities. Moreover, higher-quality products earn greater expected profits, and the monopolist has an incentive to provide even transient improvements in quality. Finally, the monopolist has a positive incentive to conduct market research about quality, and produces more information than is socially optimal.

Date: 1994
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