Prices as signals of product quality in a duopoly

Minghua Chen (), Konstantinos Serfes () and Eleftherios Zacharias
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Minghua Chen: Research Institute of Economics and Management, Southwestern University of Finance and Economics
Konstantinos Serfes: Drexel University

International Journal of Game Theory, 2023, vol. 52, issue 1, No 1, 31 pages

Abstract: Abstract In a duopoly model of horizontal and vertical differentiation, where consumers are ex-ante unaware of product qualities, we study the firms’ incentives to signal quality via prices. Consumers, after they observe prices, can evaluate a firm’s product quality before purchase if they incur a search cost. We show that a complete information (undistorted) separating equilibrium and a unique pooling equilibrium (in pure strategies) exist. A lower search cost moves the market equilibrium from pooling to separating and induces a mean-preserving spread in the distribution of the equilibrium prices.

Keywords: Product quality; Signaling; Costly search; D8; L13 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00182-022-00808-1

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