Quality at Stale Prices

Georgy Lukyanov (), Konstantin Shamruk and Ekaterina Logina

Papers from arXiv.org

Abstract: We study a continuous-time game in which a firm privately chooses quality and a public-information pricing desk revises its posted price at Poisson opportunities. Customers learn from purchases and silence. For an open set of primitives, we construct an equilibrium in which a previously optimal price sustains quality even though the desk would lower it upon revision. Quality costs exceed every immediate sales return, making the continuation reward necessary. We characterise both the resulting quality episodes and their lifetime incidence. A purchase ends an episode by raising reputation, a revision by changing the price, and silence by lowering reputation. Near the zero-quality threshold, the quality probability has a limiting parabolic profile and most episodes end through silence. If $\delta$ is the cost shortfall below that threshold, the expected lifetime number of high-quality decisions and the probability of any such decision are both of order $\delta^{3/2}$ from a specified upstream state. The persistent type is eventually learned, strategic quality ceases, and prices settle at type-specific levels. The construction is local at fixed finite discounting.

Date: 2025-08, Revised 2026-10
New Economics Papers: this item is included in nep-com, nep-cta, nep-gth and nep-mic
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